Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Infosys Vs IBM: Converging? - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • May 25, 2004

    Infosys Vs IBM: Converging?

    One is the world's largest technology company. The other is India's second largest. The first has US$ 89 bn in consolidated revenues for FY04. The second has a meager 1.3% of the same. However, keeping the 'size' factor aside, these two companies have established benchmarks on the capabilities, vision and execution fronts. In this article, we will try to compare these two technology majors - IBM and Infosys. In case of IBM, we will take into consideration the company's global services and software (products) divisions only.

    International Business Machines (IBM)

    IBM was incorporated in the state of New York in 1911. Currently, the company derives its revenues from five major streams, viz., global services (48% of revenues), hardware (32%), software (16%), global financing (3%), and enterprise investments (1%). As we have said, for comparison purposes, we would take into consideration only the global services and software division of the company. These two segments have grown at a CAGR of 6% over the period FY00 to FY04. The staid growth is the testimony of the slowdown that had engulfed the global technology industry and had affected IBM's revenues, specifically from these two segments.

    Within the global services segment, the company derives the largest chunk of its revenues from strategic outsourcing (40% of global services revenues) and consulting services (30%). Higher contribution from the consulting space is indicative of the domain competency that the company possesses in verticals like telecom, healthcare, utilities and finance. IBM also benefits from the software (products) segment, which contributes to around 16% of the consolidated revenues. The benefit arises from the fact that this segment contributes heavily to the bottomline growth of the company (gross profit margins at 87% in FY04).


    Infosys, on the other hand, is recognised globally for its world-class management practices and work ethics. The company has been on a constant move up the software value chain and offers services, among others, like software development (26% of revenues), maintenance (30%), IT consulting (3%) and ITES (2%). The company offers these services through its highly integrated global delivery model. Revenues have grown at a CAGR of 53% between FY00 to FY04, which is significantly higher compared to IBM, albeit at a lower base.

    In a case similar to IBM's, as the technology slowdown had engulfed clients across the globe, while volumes continued to remain strong, billing rates were under significant pressure. However, the slowdown has actually provided a fillip to the whole outsourcing space. As such, Infosys has been able to achieve high (relative to the industry) levels of growth through its endeavor of moving rapidly up the software value chain (36% of revenues is derived from high-end services). The company seems just on the threshold of entering into the league of global players like IBM.

    However, on the products front, Infosys' move has been rather slow. Its banking product, Finacle, contributes to just around 2% of the consolidated revenues and has not been able to support it falling margins. We believe that the contribution from this segment will continue to remain miniscule (1.6% in FY07).

    While this ends the background, it is important to understand that both these majors are trying to enter into each other's space. While IBM is aiming at replicating (and doing that successfully) the Indian offshore model for providing more cost-effective services to its clients, Infosys, with its capabilities on the global delivery front, is trying to develop domain competencies. IBM has established a strong base in India (around 15,000 employees). It has indeed been successful in garnering a huge US$ 750 m 10-year deal from Bharti Televentures for the providing development and maintenance services.

    * Returns are calculated on Rs 100 invested in May 2001.
    ** Based on FY04 earnings.

    At Rs 5,318, Infosys is trading at a P/E of 28.7x FY04 earnings and 19.5x our FY06 expected earnings. On the other hand, at US$ 87, IBM trades at around 19.4x FY04 earnings. While the US stocks generally trade at relatively higher valuation levels compared to Indian stocks, the valuations accorded to IBM are indicative of low investor expectations. As far as Infosys is concerned, it trades at an attractive valuation from a 3 to 5 years perspective.

    Given this backdrop, is there anything significant that is learnt from this comparison?

    1. Overall, the gross profit margin of IBM stands at 40.6%. But if one were to exclude the profit contribution from the products segment, IBM's global services margins stand at 25.2%. This when compared to Infosys' margin at 47.6% is definitely lower. While we expect Infosys' margins to decline in the future, the company is gradually moving up the value chain and to that extent the rate of decline will be slower.

    2. While we are not sure whether US$ 1 bn of revenues is 'the' threshold limit, surely, it will enable Infosys to showcase its ability while bidding for larger contracts in the future. At the end of the day, the company already has a proven track record of delivering services for over 15 years now. So, the long-term growth prospects, from this perspective, are encouraging.



    Equitymaster requests your view! Post a comment on "Infosys Vs IBM: Converging?". Click here!


    More Views on News

    Infosys: A Decent Start to FY18 (Quarterly Results Update - Detailed)

    Jul 14, 2017

    Infosys starts FY18 on an encouraging note with a stable performance.

    Infosys: A Flat End to FY17 (Quarterly Results Update - Detailed)

    Apr 13, 2017

    Infosys ends FY17 with a 7% QoQ fall in net profit for the March quarter.

    Infosys: A Decent Quarter (Quarterly Results Update - Detailed)

    Jan 13, 2017

    Infosys has reported a 0.2% QoQ decrease in the topline and an increase of 4.6% QoQ in the bottomline for the quarter ended December 2016.

    Tech Mahindra: Our Revised View (Quarterly Results Update - Detailed)

    Aug 2, 2017

    A better than expected turnaround in performance results in a change in view.

    Wipro: A Decent Start to the Year (Quarterly Results Update - Detailed)

    Jul 27, 2017

    Digital services drive growth for Wipro in 1QFY18.

    More Views on News

    Most Popular

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)(The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    It's the Best Time to Buy IT Stocks(Daily Profit Hunter)

    Aug 16, 2017

    The IT Sector could be in an uptrend till February 2019. Are you prepared to ride the trend?

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 23, 2017 (Close)


    • Track your investment in INFOSYS LTD with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
    • Add To MyStocks


    Compare Company With Charts