X

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. TCS: Round 2 - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Jun 28, 2010

    Infosys vs. TCS: Round 2

    In the first article of this series, we compared Infosys and TCS as per the P/E multiple. This showed us how much investors were willing to shell out for owning each of these stocks. We found out that TCS is currently trading at a premium to Infosys based on standalone earnings. A big difference from the situation a few years back. Anyways, in this article, we will compare how these companies fare in terms of profitability.

    Profitability of Indian IT companies
    Both TCS and Infosys work on the IT services outsourcing model. Most of their clients are overseas, but a large majority the work gets done in India and other low cost locations. Thus they are able to earn in dollars or pounds and spend in rupees. Exchange rates of the rupee versus these currencies make a big difference to their profitability. Rupee appreciation or depreciation causes net profits to see-saw. But, this situation is universal across all Indian IT companies.

    Let us now discuss one of the key triggers that IT companies employ to improve their profitability. It's called the 'onsite-offshore revenue mix'.

    Onsite employees refer to the employees working at the clients end, usually in an overseas location. Offshore employees are the ones working in an outsourcing hub (eg. India). As expected employees onsite get higher salaries than their counterparts in India. Billing rates for onsite employees are also higher

    So simply put, for IT companies:

    • Onsite work= Higher revenues, low volumes, but low margins - as costs are also high

    • Offshore work = Lower revenues, high volumes, but high margins - as costs are low

    Given this, It companies can play around with their margins using the onsite-offshore ratio. Here is how see how these two companies compare on this.

    Source: Annual reports, Equitymaster Research,
    *TCS's onsite mix includes revenues from its Global Development Centres

    FY10 was a lesson in cost management for most IT companies. Pricing pressure from clients as well as a slowdown in discretionary IT spending caused most companies to face margin pressure. They reacted by cutting costs and improving operational efficiencies. TCS also changed its onsite-offshore mix. For many years TCS had one of the highest components of onsite revenues. This helped it increase visibility among clients and bid for large overseas deals. This is why its overall revenues were always higher than Infosys. But, Infosys was the king on the profitability front.

    Source: Annual reports, Equitymaster Research,

    During the recession however, as part of a strategic management decision TCS decided to build greater offshore capabilities. This lead to a huge jump in its offshoring mix as seen in FY10. Since this business has higher margins, it had an immediate impact on TCS's operating profits.

    Source: Annual reports, Equitymaster Research,

    TCS reported its best ever operating profit margin in FY10. Greater offshore abilities helped it provide greater value to clients at lower costs. Since most clients were also cash strapped during the recession, this move was a better option for them as well. TCS increased its offshoring presence sharply in FY10. But will it continue to increase it at such a pace going forward remains to be seen.

    With the global situation improving and large contracts up for grabs, both companies will need to increase onsite presence. Certain contracts, especially ones from overseas governments, need a higher onsite presence. TCS has plans to recruit at least 3,000 employees onsite in FY11. Infosys plans to hire at least 1,000 people overseas.

    Conclusion
    We believe that Infosys still has the edge over TCS in operating margins. But, it has already leveraged its offshore presence. TCS still has room to use this margin lever and further increase offshore presence. Infosys recently expressed interest in overseas expansions to increase value added offerings such as consulting as well as growing its sales faster. It plans to raise its non-Indian employee base to 15% by 2012, from the current 5-6%.

    We also believe that TCS may increase its offshoring presence further if it faces cost pressures. It may either keep offshore revenues at the same level or increase it marginally going forward. Infosys on the other hand wants to increase its employee base overseas. We thus see that with margins expected to shrink across the board in the future, the profitability gap between the two rivals may close down.

     

     

    Equitymaster requests your view! Post a comment on "Infosys vs. TCS: Round 2". Click here!

      
     

    More Views on News

    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.

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

    Jul 14, 2017

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

    Ankit Shah's First Five Insider Recommendations (The 5 Minute Wrapup)

    Aug 5, 2017

    How to get exclusive insider recommendations from Ankit Shah.

    TCS: Currency Volatility Plays Spoilsport (Quarterly Results Update - Detailed)

    Jul 14, 2017

    TCS starts FY18 decently despite an adverse currency impact.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    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.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    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!

    More
    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

    S&P BSE IT


    Aug 22, 2017 (Close)

    S&P BSE IT 5-YR ANALYSIS

    COMPARE COMPANY

    MARKET STATS