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Software: Infosys Vs Wipro

Jun 27, 2003

In the Indian IT industry, there are two companies that are a class apart, and way ahead of competition. These two behemoths of the Indian IT sector, Infosys and Wipro, have made their presence felt in the international IT scene as well, through their global delivery model and quality service offerings. In this article, we try to bring out a comparison between these two pioneers of the IT revolution in the country.Both Infosys and Wipro have highly mature and evolved delivery models, and this represents their competitive advantage. Over the years, both these companies have developed their onsite and offshore execution capabilities and have delivered high quality, scalable services to their clients. And in this process, they have made substantial investments in putting in proper infrastructure and systems in place. More importantly, these companies have been able to integrate the onsite and offshore services, and this helps them in offering seamless, high quality solutions to their clients.

While Infosys has focused its efforts and resources on providing IT services, Wipro, apart from IT services, has a diversified presence in IT hardware, consumer care, lighting, and health sciences. However, as far as IT services are concerned, both these companies have been able to make a swift movement up the software value chain. Both these companies have shifted their focus towards more high-end services like IT consulting, package implementation, systems integration. Even though at present the revenue contribution from such high-end services is still miniscule, the trend is likely to change in favour of these high-end services going forward.

However if one were to consider the existing revenue streams of the two companies, Wipro is exposed to a larger risk. This is because 36% of its revenues are derived from the telecom R&D segment, which provides services to telecom equipment majors like Nortel, Cisco and Lucent. Wipro’s clients in this space were the worst affected due to the technology meltdown globally and the revenues from this space have shown a marginal decline (-3.1%) in FY03. Thus going forward since there is lack of clarity regarding the recovery of the global telecom industry, a significant part of Wipro’s revenues will continue to face volatility.

In comparison, Infosys does not face this risk, as it does not have a substantial presence in a single segment. Moreover, Infosys has developed a core banking solution (essentially a software product), which has found success in the domestic as well as international markets. Thus we may observe better topline growth for Infosys as compared to Wipro going forward as Infosys core revenues seem more sustainable in the long term. However, for both these companies, growth will be volume-driven.

A comparison on the basis of certain growth ratios as shown in the table below further differentiates these two companies. Infosys, as the table shows, has been able to outperform Wipro in almost all parameters – sales growth, EPS growth, return on networth, return on assets, and return on investment.

(%)InfosysWipro*
Sales growth (TTM**)39.124.6
Sales growth (5-year avg.)72.526.0
OPM (TTM)35.125.6
EPS growth (TTM)18.6-7.3
EPS growth (5-year avg.)35.633.8
RoNW (TTM)33.524.7
RoNW (5-year avg.)35.529.4
RoA (TTM)26.920.2
RoA (5-year avg.)29.120.7
RoI (TTM)33.524.9
RoI (5-year avg.)35.328.9
*Wipro Ltd. (includes IT services, hardware, consumer care, lighting and health sciences)
**Trailing Twelve Months (FY03)

Even when both these companies have been facing enormous pressure in recent times owing to the economic slowdown, and MNC competition, Infosys has been able to maintain margins in a better way compared to Wipro. But it is not to deny the strength and expertise that Wipro possesses. In recent times, Wipro has been able to attract larger-sized and longer-term contracts than Infosys, and this speaks a lot about the company’s ability to successfully bid for large contracts abroad.

Valuations favour Infosys…
(X)InfosysWipro
P/E Ratio (TTM)22.026.0
Mkt. Cap/Sales5.94.9
Price/Book Value7.06.0
Price/Cash Flow19.021.0

Moving on to valuations, while Infosys’ valuations look reasonable despite margin pressures, Wipro’s valuation seems to be stretched. With the Indian IT stocks trading at an average P/E of 18x their FY03 earnings, Wipro looks highly priced. Another risk for Wipro is the low level of floating stock (around 16%) that has consigned the stock to high volatility levels in the past, and this may continue going forward.


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