There is a dissonance between the quarterly results of India’s top two software companies, TCS and Infosys Technologies, and the response it evoked in stock markets. The latter apparently did not like the results as they beat down the stocks. While Infosys was faulted for not living up to the expectations of the analysts and suffered a greater fall, TCS produced very good numbers but still saw its stock decline. There can be many reasons for a stock’s rise and fall. A downward movement in response to good news can be a correction to earlier over-optimism. But the stock market’s contrariness needs to be underlined to make the point that the outlook for Indian software is positive, Indian leaders are well poised to take advantage of it and the absence of any feel-good sentiment over the sector right now does not appear to be based on fundamentals. In particular, while analysts have pilloried the Infosys results, its numbers over the last few quarters have consistently met guidelines. If anything, it is the excessive exuberance of the analysts in the run-up to the results that needs highlighting.
However, the recent trends in the results of the two major players tell two different stories. For several quarters now, TCS has been catching up on what has traditionally been the biggest feather in Infosys’ cap: high margins resulting from a pricing premium that none else could command. In the last quarter, TCS has actually pipped Infosys to the post, recording a net margin of 25.8 per cent, against 25 per cent of Infosys. While over the last few quarters, Infosys’ net margin has been steady but lower than earlier, over the last three quarters TCS has improved its net margin over its earlier performance. Over the same period, TCS has also recorded a faster sequential (quarter on quarter) rise in the topline.
TCS’ recent improved performance can be attributed to its boldness in accessing inorganic growth, charting out new geographies and being able to digest all this. On the other hand, Infosys has remained its usual conservative self and produced solidly commendable results. Both the companies are world beaters in being able to command 25 per cent net margins. Being able to keep growing fast for well over a decade now indicates that they are not continuing to rely solely on their earlier cost advantage. They have been going up the value chain, acquiring domain knowledge (industry-specific skills) and increasingly assisting clients in reshaping their entire operations to gain newer efficiencies, which are imperative for survival in the financial crisis-induced downturn. What is important is that these firms have picked up the slack that they had developed in 2009-10 even as recovery in mature markets, where their main customers reside, has been uncertain. Undoubtedly, the Indian leaders face a major challenge in maintaining their scorching pace of growth and high margins, and they are aware of it. Hence the generational changes that have taken place at the top. Thus, right now they seem to be measuring up to the challenges before them.
