Revenue growth of Infosys to be better than TCS in FY23: Moody's

Moody's has reaffirmed ‘Baa1’ ratings for Infosys and Tata Consultancy Services (TCS), the country’s top two IT companies, but projected the revenue growth of Infosys to be at 13% as against 8% for that of TCS in FY23.

The rating agency cited good corporate governance, strong balance sheets, large liquidity and net cash position to be the reason for both Infosys and TCS securing 'Baa1' ratings.

Moody's expects the revenue growth of Infosys to moderate to around 8% in FY24. “Improving employee utilization from hiring in prior years and steadily declining attrition amid global uncertainties will likely arrest any further margin pressure, with its earnings before interest, taxes and amortization (EBITA) margin remaining around 24% over fiscal years 2024 and 2025,” the rating agency says.

The rating agency expects Infosys to return up to 85% of its free cash flow (cash flow from operations - capital spending) through shareholder distributions. "The stable outlook reflects Moody's expectation that Infosys will maintain its robust business model and competitive market position compared with its global peers. The stable outlook also incorporates the agency's expectation that Infosys will preserve its large net cash/liquid investments position while maintaining an extremely solid balance sheet, underpinning its strong financial profile," it says in a statement. 

Meanwhile, Moody's expects the revenue growth of TCS to slow to around 5% in fiscal years 2024 and 2025. The rating agency projects TCS’ EBITDA margin to remain around 25% over FY24 and FY25. "The stable outlook reflects Moody's expectation that Infosys will maintain its robust business model and competitive market position compared with its global peers. The stable outlook also incorporates the agency's expectation that Infosys will preserve its large net cash/liquid investments position while maintaining an extremely solid balance sheet, underpinning its strong financial profile," the rating agency says. 

During the quarter ended December 31, 2022, Infosys' net profit surged 13% year-on-year (YoY) to ₹6,586 crore, while its revenue reported a 20% YoY jump to ₹38,318 crore. The company revised its revenue guidance for FY23 to 16%-16.5% from 15-16% earlier. During the quarter, the company’s operating margin stood at 21.5%. Infosys retained its FY23 operating margin guidance at 21%-22%.

TCS reported a net profit of ₹10,883 crore for the third quarter of FY23, up 10.98% year-on-year from ₹9,806 crore in the corresponding period last fiscal. Revenue from operations jumped 19.1% YoY to ₹58,229 crore during the quarter ended December 31, 2022, aided by cloud demand and market share gains. The company’s operating margin contracted from 0.5% year-on-year to 24.5%. The net margin of TCS stood at 18.6%. The company's order book stood at $7.8 billion at the end of the third quarter.