The top two IT companies in India have declared their results. The bottom-line is -- the Sun, is once again, shining on the IT sector. The September 2013 quarter is special for the top two companies as they have bagged the highest order inflow in their history. Markets had captured the optimism long before the results were declared.
Analysts are betting that valuation gap between the two companies, TCS and Infosys, would reduce and money would flow out of TCS into Infosys. We take a look at the performance of the two IT majors for the quarter ended September 2013 to figure who is standing on a stronger wicket. The comparison will be made on parameters like financial, human resources and operational.
Financial
It would not be fair to compare the two companies on absolute basis as TCS is much bigger than Infosys. TCS posted sales of Rs 20,977 crore while Infosys recorded sales of Rs 12,965 crore. It would thus be better to compare them on a percentage or ratio basis. To be fair to TCS, their size should mean that they can be excused if their growth numbers are lower.
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| Infosys | TCS | |
| Sales (Rs crore) | 12,965.00 | 20,977.00 |
| Sales Growth (QoQ) in Rs | 15.10% | 16.60% |
| Sales Growth (QoQ) in $ | 3.80% | 5.40% |
| Profit Growth (QoQ) in Rs | 1.40% | 23.90% |
| Sales Growth (QoQ) constant Currency | 2.40% | 6% |
| Volume Growth (QoQ) | 3.10% | 7.30% |
| Gross Margin | 37.90% | 48.02% |
| SGA (% of revenue) | 13.45% | 17.85% |
| OPM | 24.50% | 30.20% |
| EPS (Rs) | 42.12 | 24 |
| PE | 21.02 | 30.08 |
TCS despite its size has been able to grow faster and runs a much tighter ship. In constant currency term, TCS has grown almost twice as fast as Infosys; same is the case with volume of work handled during the quarter. Further, TCS spends more on sales and marketing and has managed to post its best ever operating margin. Though there has been an improvement in Infosys’ margin, despite a salary hike in the previous quarter, there is a lot of gap between the two. With Narayana Murthy back in the hot seat, expectations are that stress will once again be on low margin bread and butter segment.
Where Infosys scores over TCS is in its capital structure. Its lower equity base means more profit in the hand of the shareholders for every share they hold, as seen in their earnings per share (EPS).
Human Resources
IT sector is about human resources, how well you manage them and how much you can make them sweat. While number of employees is directly proportional to sales, it is the rate of utilisation which decides which company is exploiting its resources better. Further, employees added in the quarter also give an indication of how they visualise the future. More employee addition means the company is gearing up for more work. Higher attrition rate is generally viewed as a sign of dissatisfied employees leaving the company. But the bottom-line is how much revenue does the company generate per employee.
The table shows that TCS has been able to manage its human resources much better than Infosys, which is also reflected by the lower attrition rate and higher utilisation rate. A higher bench (employees on the payroll but not working on any project) for Infosys has been its bane for a long time now, which is also one of the reasons for its lower operating margins. But the high attrition rate forces Infosys to keep a bigger bench.
| Infosys | TCS | |
| Employees Added | 2,964 | 7,664 |
| Total Employees | 193,148 | 285,250 |
| Utilisation rate (ex trainees) | 77.80% | 83.40% |
| Utilisation rate (incl trainees) | 73.70% | 75% |
| Attrition rate | 17.30% | 10.90% |
| Sales per employee | 671,247 | 735,390 |
(The numbers in the table include those from the BPOs)
Operations
Operationally, it is all about risk management. How, diverse are the clients spread in terms of geography and verticals. Though it is important to have a larger number of clients to de-risk the business, it has been found that in large companies, top 10 clients generally contribute one-fourth of the sales.
Concentration on a single geography might be helpful in good times but affects the business severely during bad ones. Similarly, high exposure to a particular vertical, say BFSI (Banking, Financial Services and Insurance) affects the business during a financial crisis. A well diversified portfolio will not result in spikey growth but ensure a smooth curve.
| Infosys | TCS | |
| US Contribution | 64% | 53.20% |
| Europe Contribution | 24% | 17.30% |
| Verticals Contribution | ||
| BFSI | 33.40% | 43.10% |
| Retail | 24.20% | 13.90% |
| Telecom | 8.30% | 9.30% |
| Manufacturing | 23.20% | 8.40% |
| Clients Added | 68 | 51 |
| > $100 million | 0 | 3 |
| Total active clients | 873 | 1,429 |
TCS, on account of its size manages more clients and has a much balanced portfolio in terms of geographies. In terms of verticals, it is more exposed to the BFSI space than Infosys.
Infosys has been more aggressive in acquiring clients during the quarter but has not managed to add any bigger ones like TCS who have added three clients with order size of more than $100 million. Bigger order size ensures stickiness and growth visibility.
Conclusion
In almost all parameters, TCS seems to be on a stronger footing than Infosys. That explains why it gets a higher discounting (price to earnings) of 30.08 in the market than Infosys’s 21.02. There may be a case for narrowing of valuation gap, but there is none in deciding who is the leader.