Infosys vs. TCS: Round 1 - Views on News from Equitymaster

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Infosys vs. TCS: Round 1

Jun 24, 2010

TCS and Infosys are the top two IT services companies in India. TCS is no. 1 in terms of revenues, clocking in at over US$ 6 bn. Infosys is no. 1 in profitability with operating margins of over 32%. However, which is the most valuable out of the two according to the best judge - stockmarkets? Let's find out.

We will now compare Infosys and TCS.

We have chosen the P/E multiple to find out which company is more valued. We believe that this multiple is a better valuation metric versus market cap. This is because it also factors in the earnings (profits) of the company. It determines the price an investor is willing to pay for a stock based on the company's earnings potential.

Since listing in 2004 till June 2009, TCS traded at an average discount of 5% to Infosys' trailing twelve months (TTM) P/E. This means that investors were willing to pay more for Infosys versus TCS based on its last one year's profits. However, things have changed in the past twelve months. Over this period, TCS has traded at an average premium of 17% over Infosys.

Source: CMIE Prowess
The P/E data is based on the standalone earnings of these companies.

So, the valuation gap between the two close rivals has been plugged. Let's find out why.

TCS was able to handle the storm of the global economic crisis much better than Infosys as seen from its FY10 results. And the markets have finally given TCS due credit for its efforts. Infosys was long prided for its high profitability margins and higher growth prospects. It also has greater public shareholding of 65% versus 26% for TCS. But, it hasn't announced any major contract wins lately or any acquisitions to propel growth further.

TCS is seeing a major comeback in large deals. It bagged 10 large deals in 4QFY10 as well as new ones recently from Telenor and Erricson. The company also demonstrated excellent cost management last fiscal. Operating margins reached historic highs during the year.

After being the darling of the stock market for all these years, Infosys might have to play second fiddle to TCS for some more time now. Next we shall see if Infosys can hold on to its prized operating margins with TCS close at its heels.

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