Five reasons why Infosys will outshine TCS

MUMBAI: Going by its performance over the past few quarters, Infosys seems all set to cast a grand comeback of sorts. The phase of dull show between 2009, when the financial crisis in the West marred the demand for Indian software exporters, and 2014 when Vishal Sikka took the charge as CEO, seems to be over. Infosys (Infy) has once again started showing signs of sustainable growth. For investors, the resurgence of Infy comes at a time when its largest peer Tata Consultancy Services ( TCS) has hit the slow lane. This will reflect in the way stocks of these two giants move in the coming months. Here are five factors that will help Infy to do better on the bourses:

Higher Revenue Visibility

Infy clinched four deals in the $25-million and above basket of client accounts during the December quarter. In comparison, TCS was a bit sluggish with two wins in the $20-million and above bracket. The Infy management said that three more deals were about to be finalised in the immediate term apart from a large $600-million renewal deal. TCS, on the other hand, is facing lower growth in the non-US markets, mainly in Europe and India, which contribute 33% to revenue.

Volume Growth

Infosys surprisingly retained the sequential business volume growth at 3% in the December 2015 quarter despite the seasonal weakness. This reflects a better traction in project execution compared with TCS, whose volume was near flat from the quarter ago.

Levers to Support Profitability

Infy has improved employee utilisation from 74% in March 2013 to 80.6% in December 2015. The company is also looking for ways to improve the offshore component of the revenue to improve profitability.

Increased Growth Momentum

Infy has shown a stronger momentum. The sequential growth in its dollar denominated revenue was higher than that of TCS in each of the past three consecutive quarters to December 2015. In addition, Infy’s sequential incremental revenue on a trailing 12-month basis was close to the six quarter high of $189 million as of December 2015. On the other hand, TCS reported $214 million of incremental revenue, the lowest in 24 quarters.

P/E Premium

The trailing price-earnings (P/E) ratio of Infy was 20 on Thursday compared with 18.9 for TCS. Just six months ago, Infy was trading at a P/E of 18.5 while TCS was at 25.6. The reversal of Infy’s P/E from discount to premium compared with TCS shows the changing perception of investors towards the future prospects of these companies.