Infosys trails TCS in Q1 on muted BFSI performance, but outlook is strong

A building in the Infosys Thiruvananthapuram in Technopark Phase 3 | Photo: Wikipedia
Even as there was no surprise in store during the June quarter performance of Infosys compared to Tata Consultancy Services, it was a study in contrasts.  The key difference was in the performance in the banking and financial services (BFSI) segment, which accounts for over 30 per cent of revenues for both companies. 

While Infosys registered a sequential fall in revenues by 0.2 per cent, the same for TCS was a growth of 3.7 per cent.

The commentary on the financial services space also differed between the two companies. While TCS said banks are increasingly giving incremental contracts, Infosys indicated that banks continue to depend on their own captive centres as far as the June quarter is concerned. 

The outlook for both, however, has been optimistic with increases in overall deal wins as well as gains in the financial services space. Infosys indicated that of the $1.1 billion large deals, 40 per cent has come from the financial services space (overall trailing contract value of $3.5 billion). TCS, too, indicated strong revenue potential with total contract value of $4.9 billion. Moreover, Infosys added four $100 million clients taking the count to 24. This is among the highest in recent quarters while TCS added two in this revenue bucket. The addition of high value clients and deal wins bodes well for both the companies.

Despite the strong outlook, Infosys stuck to its earlier FY19 growth guidance of 6-8 per cent on a constant currency basis as compared to the double digit growth expected from TCS. Analysts say while both the companies are bullish about the demand landscape, there will be execution challenges for Infosys given the leadership transition and some senior level exits. However, they believe that Infosys will be able to end up at the higher end of the 6-8 per cent range given strong growth in retail (6.4 per cent, the highest across verticals), improving financial services outlook and traction in the digital space.

Like TCS, Infosys, too, reported a strong 25.6 per cent growth in digital revenues and the segment now accounts over 28 per cent of revenues as compared to TCS’ 25 per cent. Given the higher margins from the digital segment, analysts believe that improving proportion of digital should help Infosys improve on its 22-24 per cent margin guidance for the current fiscal. Given the pricing pressures in the legacy business, volume gains and automation are some of the other levers on the profitability front for the company.

While there is a clear outperformance by TCS, analysts believe that the 30 per cent premium in valuations are expected to narrow a bit as Infosys revenue growth gains traction.