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What To Expect From TCS, Infosys

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For the first time ever, India's top two outsourcing companies — Tata Consultancy Services and Infosys — will release their earning results on the same day, 12 July. IT bellwether Infosys results will come first, followed by peer Tata Consultancy Services. While little Q1 growth is seen for TCS and Infosys, analysts are divided in their views on the two stocks.

Investors are also wondering which of the two companies will set the tone for the financial performance of the IT industry. By all means TCS looks the stronger contender. Shares of Infosys, which has a market value of about $25 billion, are down about 11.5 per cent this year, while those of top-ranked TCS are up about 8.7 per cent. By comparison, the Sensex has gained about 13  per cent.

Dipen Shah, Head of Fundamental Research, Kotak Securities, feels the market does not have high expectations from IT companies which might actually act as cushion for the market. But, at the same time, he says, propelled by sharp rupee depriciation, IT companies should have higher margins than other companies. He prefers to repose confidence in the medium-to-long term growth rates of Corporate India if the markets have to sustain the current levels and move up.

Uncertainty about spending by US and European clients in a weak global economy will likely weigh on the earnings of Indian outsourcers, dampening hopes that demand will pick up in the second half of the year. But the companies are expected to benefit from an 8.5 per cent fall in the rupee during the quarter.

"The rupee depreciating is not a reason good enough to play these stocks, as the outlook in terms of  overall demand remains weak," says Apurva Shah,  head of research at BNP Paribas Mutual Fund, which manages investments of about $750 million, including in the top Indian IT companies.

He further says "hopes of a recovery in the second half are just that, hopes."

India's $100 billion-a-year information technology and back-office outsourcing industry earns about three-quarters of its revenues from customers in the United States and Europe.

Analysts expect No. 2 ranked Infosys Ltd., the only top-three vendor to provide a full-year forecast, to pare its revenue growth estimate for the current fiscal year to as low as 5 percent when it posts quarterly earnings on July 12.

The company in April had forecast 8-10 per cent growth for the fiscal year ending March 2013, already disappointing investors enough to cut 13 per cent of its market value on the day. It has gained about 2 per cent since.

Industry body, Nasscom (National Association of Software and Service Companies), expects the industry to grow exports by 11-14 per cent in the current fiscal year that ends in March.

Customers continue to hold back discretionary spending due to the extended euro-zone crisis and the absence of unequivocal data that an economic recovery is under way in the United States, the Indian providers' biggest market.

Demanding Clients
The sluggish global economy is prompting clients to demand more for every dollar spent. This adds to the pressure on billing rates on a commoditised set of services that Indian firms, competing with Accenture and IBM, rely on for the bulk of their revenues.

"The depressed situation in the west appears to continue to be of concern, but the hope is that they will recover slowly," Tata Consultancy Services Chairman Ratan Tata said at the company's annual shareholder meeting on June 29.

A weaker first half may have been factored in by the street, but "hopes for recovery in 2HFY13 are fading fast," Bhavin Shah, chief executive of Equirus Securities, said in a July 2 report. He has an "underweight" rating on the IT sector.

For the June quarter, analysts expect little or no sequential dollar-term sales growth for Infosys. The company may say sales grew 0.5 percent, Deutsche Bank analyst Aniruddha Bhosale said in a note. Bhosale, who advises clients pick TCS, expects it to report sequential growth of 2.6 percent.

Infosys is expected to post a profit of Rs 2,300 crore, compared with Rs 1,720 crore a year ago,  while TCS is seen coming in at Rs 2,970 crore, 23.3 per cent more than the year-earlier period,  according to Thomson Reuters I/B/E/S.