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Infosys Vs EDS: A comparative analysis - Views on News from Equitymaster

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Infosys Vs EDS: A comparative analysis

Mar 28, 2006

Infosys is India’s second-largest software services company with revenues expected to cross US$ 2 bn in FY06. The company has consistently outperformed its peers in the sector over the past few years on most operating parameters, including sales growth, profit growth, operating margins and return ratios. Going forward, the company will have to run even faster if it wants to join the ‘big league’ of IT firms globally. This would include moving higher up the value chain into areas like consulting, infrastructure management and package implementation. In this write-up, we compare Infosys with one of the ‘Big Six’ global IT firms – EDS, formerly Electronic Data Systems. Apart from EDS, the other companies making up the ‘Big Six’ include Accenture, Affiliated Computer Services (ACS), CSC, HP and IBM. EDS, a US-based company, is one of the largest IT companies in the world, having a global network in over 57 countries. The company employs around 117,000 people and offers a wide range of IT and BPO services to companies in verticals like manufacturing, financial services, healthcare, communications, government and retail.

So, what’s the verdict?

Infosys Vs EDS: No contest!
(US$ m) FY03* FY04* FY05* CAGR (FY03-FY05)
Infosys EDS Infosys EDS Infosys EDS Infosys EDS
Net sales 754 19,538 1,063 19,758 1,592 19,863 45.3% 0.8%
Operating profit/(loss) 263 1,654 348 (80) 521 68 40.8% -79.7%
Operating margin 34.9% 8.5% 32.7% -0.4% 32.7% 0.3%    
Profit after tax 198 1,116 272 (1,698) 422 158 46.0% -62.4%
Net profit margin 26.3% 5.7% 25.6% -8.6% 26.5% 0.8%    
* The fiscal year ends on March 31 for Infosys and on December 31 for EDS.

From the above table, it is clearly evident that Infosys beats its considerably larger competitor hands down as far as operating performance is concerned. Infosys has grown its revenues at over 45% on a compounded basis from FY03 to FY05. EDS, on the other hand, has managed to grow at a CAGR of under 1% in that period. Even if we take an extended period from FY02 to FY06, EDS’ revenues have shown a CAGR of just 0.6%. Infosys, on the other hand, has grown at a CAGR of nearly 39% from FY02 to FY06 (estimated). Even as per EDS’ CY05 annual report, the management of the company has guided for revenue growth of between 2% and 4% in CY06 over CY05. Infosys, on the other hand, is likely to see revenue growth at around 30% or thereabouts in FY07.

A major factor that has led to this handsome outperformance by Infosys compared to its much bigger rival has been the increased acceptance of offshoring by global corporations. The ‘global delivery model’, innovated and refined by Indian software companies like TCS and Infosys has proved to be a major competitive advantage for the Indian incumbent players. Coupled with considerably lower labour costs, a natural time zone advantage, execution excellence and a pool of skilled human resources, this has resulted in a paradigm shift in the way in which the global software services industry works.

After 9/11, corporations began to tighten up on their spending, as global economic sentiment took a nosedive. Companies began to demand more value for every dollar spent on technology. This proved to be disastrous for MNC IT companies, including EDS, which anyways had highly uncompetitive cost structures. This can be traced to the fact that these companies were virtually 100% onsite, which resulted in good productivity (revenues per employee), but considerably higher costs.

In contrast, this trend of clients to look for ‘more for less’ was a boon for Indian companies. This is because Indian companies had (and still have) the advantage of a strong offshore base with much lower costs. This enables them to deliver value to their clients much more effectively. A look at the two companies’ operating margins reflects the difference in cost structures. While Infosys operates at over 30%, EDS’ operating margins in CY04 were just 0.3%. Even in CY05, they were a mere 2.6%. While Infosys is reaping the benefits of having a predominantly rupee-denominated cost base and dollar revenues, EDS continues to struggle with its inefficient cost structure.

As regards net profits, Infosys has maintained strong growth in its bottomline. EDS, on the other hand, has had its profits dwindle with each passing year. Even in CY05, the company recorded a 5% fall in its net profit to US$ 150 m. A look at the two companies’ market capitalisations also reflects this. Despite being just 11% of EDS’ size in terms of revenues, Infosys’ market capitalisation, at US$ 17.7 bn, dwarfs that of EDS’ US$ 14.6 bn. Clearly, the global delivery model has changed things for the worse for this ‘Big Six’ global IT giants.

Through the crystal ball…
Going forward, the future of EDS will depend largely on how quickly it can build its offshore base and/or acquire an Indian mid-sized software company with a fairly strong delivery network. Offshoring is undoubtedly where the future lies for the software industry and EDS will need to ensure that it does not get left behind.

While it would be fair to say that the Indian companies are at least a few years ahead in this model, their MNC counterparts will certainly not sit back and do nothing. They are also fast building their offshore bases in order to compete more effectively with the Indian incumbents. The Indian firms, on the other hand, are moving up the value chain and building competencies in higher-end services, such as IT/business consulting and the like.

As for EDS in particular, it will need to do some catching up. Its MNC peers, like Accenture and IBM, are already expanding their offshore centres at an extremely rapid rate and are scaling up fast in India and other low cost countries. Infosys, on the other hand, needs to ensure that it continues to run as fast as it has all these years, in order to continue to lead the race.

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