TCS vs Infosys: Yawning Gaphttps://indianexpress.com/article/news-archive/web/tcs-vs-infosys-yawning-gap/

TCS vs Infosys: Yawning Gap

TCS has weathered slowdown,erratic rupee ably and has grown despite uncertain economic environment.

Be it a slowdown in mature markets or the erratic currency movements,the country’s largest IT services exporter,Tata Consultancy Services (TCS) has weathered it all ably and has grown despite an uncertain economic environment.

The $11 billion IT major has pumped up its topline to more than double over the last four years. From a total revenue of R30,028 crore in FY10,TCS has moved up to Rs 62,989 crore in FY13,registering a compound annual growth rate (CAGR) of 20.3% in the last four fiscals and widening its lead over its nearest rival,Infosys.

During the same period the Bangalore-headquartered software services firm posted a CAGR of 15.4% with revenue of R22,742 crore in FY10 to R40,352 crore in FY13. Not just that,TCS has managed to record growth ahead of the industry average (CAGR),which is estimated to be about 17% during the last four fiscals.

Experts point out that over the last few years,the growth for the company were broad-based across industry segments. Some felt it is the booster dose TCS got from its backbone financial services and insurance vertical that led to the industry leading growth.

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During the first quarter of the current fiscal,banking,financial services and insurance (BFSI) vertical contributed 43% to the overall revenue. The revenue gap between TCS and Infosys has more than tripled in the last four financial years,revealing the different growth trajectories of both the companies.

TCS at the end of FY13 reported a consolidated revenue of R62,989 crore against Infosys’ topline at R40,352 crore,a difference of R22,637 crore. However,this was not the situation four years ago when the revenue difference between the two IT majors was around R7,287 crore.

In US dollar terms,it would mean that what was once a gap of around $1.5 billion four years ago has now widened to more than $4 billion. This widening revenue gap reveals how TCS has been able to navigate successfully through the difficult period while Infosys is struggling to outperform the market.

During the recently concluded April-June quarter,TCS recorded revenue of R17,987 crore,a sequential growth of 9.5%,while Infosys posted revenue of R11,267 crore,growing 7.8% quarter-on-quarter.

“Growth in Q1 was led by traditional markets,and the management indicated a pick-up in discretionary spends. TCS’ commentary remains more upbeat than peers,and growth outperformance and consistent earnings delivery should help sustain its premium valuations,” said Rumit Dugar,analyst with Religare Institutional Research.

During the announcement of the Q1 results TCS indicated that it expects calendar year 2013 to be better than 2012 in terms of IT spending. “A healthy pipeline,broad-based deal signings,initial signs of upturn in discretionary spending and good traction in annuity,traditional and transformational business – all these factors have collectively lent confidence to the company in estimating FY14 to be a better year than FY13,” said Angel Broking in its recent report.

Over the last four fiscals,TCS has also managed to increase its headcount by over 70% to about 2,77,586 people at the end of Q1,while Infosys ramped up its total employee base by around 38% to 1,57,263 during the same period. For FY14,TCS has maintained its gross hiring target of 45,000 employees and has already given campus offers to about 25,000 candidates,the first batch of which is expected to join during the current quarter.

Though there has always been a difference in revenue figures between the country’s top two IT firms,Infosys for quite some time had managed a superior edge with its net profit being higher than TCS,powered by high operating margins.

Of late,the situation has reversed with TCS outpacing Infosys both in net profit and operating margins. At the end of FY13,the net profit of TCS stood at R13,917 crore while for Infosys it was R9,421 crore. On the operating margins front,TCS ended FY13 at 28.71% while it was 25.8% for Infosys.

It was in the second quarter of FY13 that TCS overtook Infosys in operating margins and since then it has consistently maintained this difference. For the first quarter ended June,2013 TCS reported operating margin of 26.9% against Infosys’ 23.6% during the same period.

Bangalore-based Infosys,which prefers not to sacrifice margins to gain higher volumes,has enjoyed better operating margins compared with other top-tier Indian IT firms. But over the last couple of quarters,it has been aggressively cutting down its prices,which brought down the operating margin.

During the April-June stretch,TCS’ Ebitda and Ebit margins improved by 29 basis points (bps) and 51 bps quarter-on-quarter to 28.6% and 26.9% respectively. Analysts pointed out that an improvement in terms of utilisation rate and deploying a lower employee wage base have led to better margin performance for TCS. The utilisation level of TCS reached a high of 82.7%,excluding trainees,in Q1,while Infosys had an utilisation rate of 75.9% during the same period.

In the first quarter ended June,TCS’ volume growth at 6.1% was the highest in the last seven quarters,while Infosys recorded a volume growth of 4.1% in Q1. “TCS’ performance during the quarter was backed by healthy demand seen across almost all its industry segments. The company’s anchor industry segment —banking,financial services and insurance (BFSI)—maintained its growth momentum with revenues growing by 2.9% q-o-q,” said Angel Broking.

Over the last five quarters,TCS has also outperformed Infosys in sequential dollar revenue growth except for the October-December period when Infosys (6.3%) posted higher revenue growth compared to TCS (3.3%) backed by revenue from its Lodestone acquisition.

Even in the first quarter ended June,TCS recorded a 16% year-on-year jump in dollar revenue at $3.16 billion,while Infosys posted a 13.6% increase to $1.9 billion during the same period.

Analysts feel with Infosys’ revenue from discretionary spends at more than 30%,excluding Lodestone,and TCS’ exposure to less than 25%,Infosys is under constant pressure to grow revenue sacrificing its operating margin.

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“TCS sales engine being exceptionally good and the execution being perfect,the market will not be surprised at the high growth the company has managed,” said Sanjeev Hota,assistant vice-president,IT research,Sharekhan.