Neck-and-neck in 2007, TCS is now $9-billion ahead of Infosys in revenue

Once an intensely fought battle for market leadership between Tata Consultancy Services (TCS) and Infosys is now turning out to be a one-sided one. With revenue and margin gap widening every year, the Tata Group company may well become twice the size of Infosys in the next five years if the current growth rate of these two information technology (IT) services giants are sustained. The revenue gap between both the companies, which stood at around $5 billion in 2013-14 (FY14), has now crossed $9 billion at the end of 2018-19 (FY19).

Between FY14 and FY19, the Bengaluru-headquartered IT firm has increased its revenue at a compound annual growth rate (CAGR) of 7.3 per cent to touch $11.8 billion in FY19, while TCS grew at a faster rate of 9.1 per cent during the same period to close the financial year at $20.9 billion. If the current CAGR is maintained by these two firms, TCS’ revenue will be around $32.4 billion in 2023-24, which will be nearly double that of Infosys’ revenues of $16.8 billion.  

“The biggest issues for Infosys were the self-inflicted wounds caused by a string of poor chief executive officer (CEO) choices. The two firms were neck-and-neck until Nandan (Nilekani) stepped down the first time (in 2007), and Infosys adopted the idea of letting each founder take a turn as CEO,” said Peter Bendor-Samuel, founder and CEO of global research firm Everest Group.

“Now, Infosys has got rid of the circular firing squad and stabilised its leadership team. It has also started growing again at above market rates. However, TCS has already opened up a huge gap in both market share and execution capabilities,” said Bendor-Samuel.

A look at the incremental revenue additions by both these companies makes the trend amply clear. While Infosys added incremental revenue of $900 million from 2017-18 to last financial year, TCS added $1.9 billion, which is around $1 billion more than that of the former.

“While TCS has increased its incremental organic revenue market share by 7.9 per cent to 37 per cent over (calendar year) CY18, Infosys has managed to raise its incremental revenue market share by a mere 2.9 per cent to 18 per cent,” wrote Ravi Menon and Ashish Agrawal of Elara Capital in a research report.

Things are also starkly similar on the operating margin front. Though both have seen a fall in margin over the last five years, the slide is much sharper in the case of Infosys. For instance, TCS’ operating margin, which stood at 26.9 per cent in 2014-15, has now dropped by 130 basis points (bps) to 25.6 per cent in FY19. But, Infosys has seen a dip of 310 bps during the same period to end FY19 at 22.8 per cent. The Salil Parekh-led firm has also guided the margins to slide further and settle anywhere between 21 per cent and 23 per cent in 2019-20.

“Over the years, Infosys’ incremental employee cost against incremental revenue (addition) has always been more volatile than that of TCS. It suggests that either the company is investing significantly ahead of revenue or its new contracts have sharply lower profitability,” the Elara Capital report added.

Also, factors like better client mining, higher execution ability, strong platform play, and low attrition have been largely favourable to TCS.

On the client mining front, TCS has scored much better than Infosys. In 2011, the number of clients who contribute over than $50 million in annual revenues stood at 39 each for both the companies. However, while Infosys has just added 21 new clients in this category till FY19, TCS has added 60 more such clients.

“Client mining for TCS seems to be a lot better than Infosys. This is one of the key reasons for the former’s faster growth. As most client accounts tend to grow in size with years, the IT firm with sound engagement cashes in on the benefits,” said Pareekh Jain, founder of outsourcing advisory firm Pareekh Consulting.

Besides, TCS’ ability to clinch large deals, which it bundles with its various platforms, is ensuring protection of the company’s margin profile, apart from increasing revenue. “At the moment, TCS seems to be clearly leading in transformational engagements. These modernisation deals are both large in size and in duration, which is allowing the company to turbocharge its growth,” added Bendor-Samuel of Everest Group.

One of the factors helping TCS in clinching these large deals is its strong product portfolio. “While Infosys started its platform business much earlier, somewhere down the line it lost focus. It still has a larger variety of platforms and clients in this area. But TCS has maintained a level of sustained focus on its limited platforms and managed to convert those into larger deals,” said Ashutosh Sharma, vice-president and research director at Forrester.

Even higher employee stickiness and diversified geographical play by TCS are reorienting the calculations in its favour. In terms of geographic concentration, TCS is fairly balanced, with 50.7 per cent of its revenues coming from the US, while Europe contributed around 30 per cent. However, Infosys continues to rely more on the US, with a 61.2 per cent share, while 24 per cent comes from Europe. 

Employee stickiness with attrition level of 11.3 per cent of TCS as compared to around 20.4 per cent for Infosys is another key differentiator. “Although Salil (Parekh) is clearly turning things around at Infosys, I don’t see the company to close the gap with TCS, given the lead the latter has. If the gap is going to close, it would most likely to happen as a result of one or more significant mergers,” said Bendor-Samuel.