Infosys vs. TCS: Round 3 - Views on News from Equitymaster

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Infosys vs. TCS: Round 3

Jul 1, 2010

In the first article of this series, we compared the two Indian software majors Infosys and TCS as per the P/E ratio. In the second, we compared them on operating margins. In this third article, we will compare them based on their most important resource. Just like iron ore for a steel manufacturer or limestone for a cement maker, employees are the most important resource for a software firm. Costs incurred on employees and revenues they generate are ways to measure the productivity of this resource. These metrics are important for software firms. This is given that they still work on a linear model. That is to say that any increase in revenue is dependent on an increase in employees. Resource utilisation
Revenue generated per employee has been on a decline for both Infosys and TCS in the past. However, TCS is now seeing some ill-effects of scale. Being the largest software company in India, it has 30% higher revenues than Infosys. However its employee base is 41% higher. Over the last five years, the company's revenues have grown at an average annual rate of 23%. But the employee base has increased at a faster pace of 25%. Thus, it has not been able to utilize its employees efficiently in terms of generating revenues. Fewer employees should be able to generate more revenues for a firm as per non linear-initiatives. TCS seems to be going the other way. Infosys' revenues on the other hand have grown at a rate of 24% over the past five years, while employees have increased by a lower 21%.

TCS now seems to be picking up things. It is working hard on its non-linear initiatives. These include its ‘Bancs' product for financial services firms, its platform based BPO solution, and cloud computing initiatives. It has also stepped up efforts on the R&D front. Patent filing has also gained importance with 87 new patents being filed in various countries (in FY10).

Revenue per Employee
Source: Annual Reports, Equitymaster Research

In terms of employee costs, Indian software firms have a significant advantage. Salaries for software engineers in India are much lower than those of their counterparts abroad. Also if other benefits, including pension and insurance are counted, it is significantly lower. TCS earlier had a higher onsite component of revenues This is what caused employee costs to be on the higher side. However since it made a strategic decision to move towards offshoring, these costs have reduced.

Over the past five years, TCS' employee costs have reduced at an average annual rate of 7%, while Infosys' has seen an increase of 1%. This overall drop for TCS was mainly due to efforts made in FY10. Last fiscal saw the company increase offshore leverage. Thus, it was able to reduce employee costs. Overseas travel and allowances also reduced due to the slowdown.

Employee coast per employee
Source: Annual reports, Equitymaster Research

Around 50% of these tech bigwigs' revenues go towards employee costs. This shows us how important a resource they are to these firms.

The talent war may have some repercussions...
Most Indian IT companies have been seeing a pickup in demand for projects. Therefore the urgent need to hire. Especially since their bench size was low during recession. But, MNCs such as Accenture and Cognizant are also seeing increased demand. They have large operations in India, and are able to offer higher salaries, almost 40% higher than what Indian firms are offering. The rising attrition among project managers with experience of between 3 to 8 years is becoming a huge worry for Indian IT majors. Attrition levels are around 40% for these managers. They handle critical delivery teams for top customers and are invaluable to these firms. Project management and leadership skills are not easy to come by. And they take years to replicate.

With the war for talent currently going on, we believe that employee and other benefit costs are going to increase in the near future. And this will lead to some pressure on margins for these players. Recession might be over, but this talent war still looms large.

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2 Responses to "Infosys vs. TCS: Round 3"

Ramia

Oct 26, 2010

Its very shame to company like CTS,TCS,Infosys they pay very good to all managers instead of software engineer who does the actual job. IT company rely completely on brain but in these company all most all managers are from NON-IT background and without doing any work taking high salary. Due to this most of the US client take back their project from these companies.

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S A Narayan

Jul 8, 2010

TCS has an Exec Dir for Strategy, Finance,and an MD and only a VP for Human Resources. For a company which has the largest number of employees , who incidentally are its only real assets, being a knowledge driven business,not having Board level representation for Human Resources is a serious lacuna, which they need to correct.

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