TCS tops Infosys, cements valuation premium

Tata Consultancy Services (TCS) has trumped Infosys Technologies on both revenue and profit fronts in the quarter ended December, and, in the process, vindicated investor faith.

A little over a quarter ago, the company had surpassed its Bangalore-based rival in the valuation multiples it enjoys.

According to Bloomberg data, TCS is currently trading at a trailing price-earnings multiple of 31.88 compared with 29.76 for Infosys.

For the quarter under review, TCS saw net profit rising a solid 9.2% quarter on quarter to Rs2,370 crore, or 24.5% of its revenues, while for Infosys, it rose 2.5% to Rs1,780 crore.

On Monday, TCS gained 1.54% to close at Rs1,137.4 on the Bombay Stock Exchange (BSE) compared with Infosys, which gained 2% to close at Rs3,268.8 on the same day.

In absolute returns, too, the company has overtaken Infosys by a wide margin.

During the last 12-month period, shares of TCS have gained about 55% compared with 33% of Infosys.

Part of the reason for the role-reversal is the consistent performance that the company has given over the last four to five quarters, when it beat analyst expectations by a comfortable margin.

“The valuation premium that Infosys used to enjoy is history,” said an analyst with a foreign brokerage who tracks information technology stocks.

“With the continued street- beating performance from TCS, the premium that it currently enjoys over Infosys will continue to increase.”

Had the company not surpassed street expectations, the market reaction would have been sharper too.

Failing to meet street expecations, shares of Infosys fell nearly 5% on the day the company announced its results.

“Had the numbers not come above expectations, the fall would have likely been harder too,” the analyst quoted earlier said.

He requested not to be identified as he is not an authorised spokesperson for his firm.

Both the management commentary as well as its hiring plans — an indication of expected future demand — bodes well for near term growth of the company’s revenues.

Compared with 40 new clients that Infosys added during the same period, TCS added 35 new clients in the December quarter.

While chief executive N Chandrasekaran said that both orderbook and deal pipelines are looking good, he also said that the IT budgets of TCS clients will be either the same as 2010 or better than that.

On the hiring front, the company plans to recruit about 12,000 to 15,000 engineers in the three months to March 30, 2011.

In the three months to December 31, TCS added 12,497 employees, more than double that of Infosys, which added 5,311 to its headcount during the same period.

At the gross hiring level, the company has already taken in over 50,000 engineers during the fiscal year till date.