The second-quarter results of the major Indian software companies threw up few surprises. TCS has continued to better expectations and Infosys has been unable to meet them, possibly paying for its inherent conservatism. There is by now a pattern in the market’s response to Infosys’ results. In their immediate aftermath, the company’s stock takes a beating; but, by the time the next quarterly results are due, the stock makes up lost ground. Most recently, there was disappointment over its downward revision of top-line guidance compared to what was announced in the previous quarter. However, it was subsequently clarified that the guidance did not take into consideration a major acquisition that the firm had recently made, as the process was not yet complete. The company’s numbers might look quite different once its impact is factored in.
The difference in market perception is a reflection of the difference in the perception of the two companies themselves. TCS has taken pride in announcing that it has delivered a strong performance with well-rounded growth across industries and geographies, whereas Infosys said global economic uncertainties continue to face the industry. Growth prospects in developed economies continue to be bleak, cutting into discretionary spending; so TCS’s optimism must result from its confidence in being able to shine even in adverse circumstances. TCS has consistently beaten Infosys in top-line growth. It delivered top-line growth of 29 per cent last year; it has averaged growth of 30 per cent in the first two quarters of this year. Infosys, on the other hand, grew by 23 per cent last year and has averaged 25 per cent so far in the current year. This is reflected in TCS keeping ahead in not just volume growth but also utilisation of staff. One striking contrast is in the change in the headcount of the two firms. In the last quarter, TCS added, in net terms, 10,531 employees; Infosys added 2,610. Infosys’ much higher attrition rate could reflect disappointment over increments – which were delayed in the first place. Employee morale within the company cannot be very robust.
Where Infosys continues to score is in net margins. It remains ahead of TCS by two percentage points; however, along with a downward revision in top-line guidance for the whole year, guidance for earnings per share has also been pared down. Infosys is paying a price for uncertainty over its future leadership. Its chief financial officer has moved on to other things in the company; an earlier CFO did the same, and eventually moved out. The markets may be in the habit of partially misreading Infosys’s numbers at first, but the firm certainly needs dynamic and assertive leadership. It is likely that, in the not-too-distant future, India’s business schools will feature a case study on the role of Infosys’s founders, and whether they remained in the top slots for too long.
