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Why Infosys, TCS shares reacted differently post results
When you invest in stocks, you own a portion of the company. So, as investors, you worry about how the company is performing financially. Company revenues and profits matter. This is why investors closely monitor result announcements. These reports have the capacity to cause great fluctuations in the prices of stocks.
Recently, two of the largest IT companies in India, TCS and Infosys, announced their results for the quarter to June 2015. Stocks of the two companies reacted differently. Infosys share price soared over 11% on the day of the results, while TCS stocks fell about 2% on June 10. Even on the day when Infosys announced its results, other IT stocks gained while TCS fell in value.
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Revenue growth:
A company may be very big and prestigious, but numbers are what matter to investors. Infosys beat analyst expectations, announcing a revenue growth of 4.5% on a quarter-on-quarter basis. TCS, on the other hand, missed the analysts' estimates. It reported a 3.5% quarterly growth in revenues. Infosys' growth was also the highest in 15 quarters. This shows that the company is growing in the long term. In contrast, there are worries that TCS may now be too big to grow fast. Infosys also reported a faster growth in volumes-the quantity of sales. Its volumes grew 5.4% from the previous quarter while TCS reported a 4.8% growth.
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Guidance:
Investors need to be assured about the company's future. This is why company guidance plays an important role. Guidance is the revenue growth the company expects to achieve in the fiscal year. Infosys increased its expected growth in dollar revenues. It expects to achieve 7.2-9.2% growth in the current fiscal year as against 6.2-8.2% earlier. This increase shows it is optimistic about the future. TCS does not give such clear guidance. However, it usually says whether or not it expects to beat the Nasscom guidance for the entire industry. Nasscom is the IT industry body. This time, though, it refused to give even this information.
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Future market share:
A key reason why TCS grew so fast in the last few years, was the poor performance of its competitors such as Infosys ad Wipro. As a result, it was easy for TCS to gain market share. This, however, may not continue. "Hitherto underperforming peers (Infosys/Wipro) are now tightening their game," an Economic Times report said. This means competition is becoming stronger for TCS, making it difficult for it to gain market share. Even in the quarter gone by, TCS grew only 4.4% in the North American market on quarterly basis. Infosys grew 5.1%. North America is the largest market for Indian IT companies, contributing to nearly three-thirds of their revenues. Expansion in this segment is very important for IT companies.
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New clients:
For the service industry, it is very important to get new projects and clients. Even more important is the need to get big-sized projects, which could bring in more revenues. Infosys added three clients with projects worth more than $100 million. TCS, in contrasts, added only one.
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Stock valuations:
It is good to buy stocks of profitable companies, but it is better to buy such stocks at cheaper rates. You can make more profits if you buy cheap and sell at higher rates. This is why stock valuations are important. It compares the stock price with the company's earnings on per-share basis. Higher the PE or Price-to-Earnings ratio, costlier is the share. TCS stock jumped 200% in the last five years, while Infosys grew just over 30%. TCS shares have already priced in its future growth potential. Infosys stocks, in contrast, still have room to grow. This can also be seen in the fact that Infosys stock is valued at 18.5 times its expected FY16 profits, while TCS valuation stands at 20, as per a Kotak Securities report.
Here are reasons why:
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14.2%
Employees are IT companies' key assets. So, it hurts IT companies when employees keep leaving. This is measured by attrition. For many years, Infosys faced high attrition rates. It reported an attrition rate of 14.2% in the June 2015 quarter, down from 23.4% a year ago. TCS's attrition rate, however, increased to 15.1% in the quarter from 12% last year.
