Infosys vs. TCS: Round 4 - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Infosys vs. TCS: Round 4

Jul 8, 2010

We had earlier compared the two IT biggies Infosys and TCS as per various metrics including the P/E ratio, operating margins and employees. In this final article of the series, we will discuss which company has been a more stable performer in the past. We will specifically look at their performance on the revenue growth and operating margins fronts.

Revenues growth comparison: Over the past few years, the Indian IT sector has grown at a rapid pace. High double digit growth rates were the norm. But, in FY10 due to the global economic crisis the software companies witnessed the slowest growth in over a decade. The sunshine days for the industry surely seem to be over.

Source: Annual Reports, Equitymaster Research
Note: Sector average is based on the average growth rates of the top 5 Indian IT companies
2007 sector growth rate is higher due to Tech Mahindra signing a US$ 1 bn deal with British Telecom
Since HCL Tech's fiscal is June ended - FY10 is an estimate

Over the coverage period, both TCS and Infosys have shown similar movement to how the sector has performed in the period. Infosys however outperformed TCS in revenue growth. It even reported better growth rates than the sector average in FY09, but dipped slightly in FY10. But we believe that Infosys will remain the gold standard of the Indian IT industry with strong growth going forward. However, TCS is close on its heels with new deal wins and new service offerings. New services, launched only in the past few years contributed over 25% of total revenues for TCS.

Operating margins comparison: Infosys clearly has the edge in terms of operating profit margins. It is well ahead of its peers. This is mainly due to its efficient operations and offshore leverage. We had earlier mentioned that TCS is catching up quickly since it has increased its offshore presence. Nonetheless, we believe Infosys will maintain its leadership position going forward on this front as well.

Source: Annual Reports, Equitymaster Research
Note: Sector average is based on the average margins of the top 5 Indian IT companies
Since HCL Tech's fiscal is June ended - FY10 margins are an estimate

Exposure to Europe and future outlook: The Euro-zone crisis has captured headlines over the past few months. While Indian IT companies' clients in North America have been increasing the amount of work they outsource to India, European clients are still tentative. Even with the huge bailout announced for the Euro nations, clients there are still unsure about the future outlook. Gartner has also lowered its forecast on the IT industry. It lowered its estimate on growth of IT spending from 5.3% to 3.9% currently. The main reason for this downgrade was the devaluation of the euro versus the dollar since the beginning of the year.

Infosys has around 23% of its revenues coming from Europe, including UK. However, in terms of currency exposure, only 7% of its revenues are exposed to the Euro and around 8% exposed to the British Pound. Although the region contributes 23% of its revenues, only around 15% of its revenues will be affected due to adverse currency swings.

TCS on the other hand has almost 27% exposure to Europe. Of this a little over 10% is from Europe with the rest coming from UK. Thus, we believe that TCS will be more affected due to adverse currency swings as compared to Infosys. This will have some affect on its rupee revenues, as well as its margins in the short term.

According to Forrester Research, the drop in the Euro is expected to result in at least 12-15% loss in income for Indian software vendors in Europe. It however suggests that service providers could look at increasing billing rates by 10% or more and modify contracts in order to protect themselves against any further drop in Euro's value. Thus clients will be asked to bear the brunt of forex risks.

But, since private clients and governments in Europe are still struggling from the slowdown, they will push for lower billing rates and may even reduce offshoring contracts. All these factors may lead to a drop in revenues from the region, which contributes almost 1/4th of the total revenues of these firms

Equitymaster requests your view! Post a comment on "Infosys vs. TCS: Round 4". Click here!


More Views on News

Why Did Shares of Nazara Technologies Plunge Today? (Views On News)

Jun 18, 2021

Rakesh Jhunjhunwala-backed Nazara Technologies plunged over 12% today.

Birlasoft Hits 52-week High as Company Signs AI Partnership (Views On News)

Jun 9, 2021

The stock has rallied 350% in the last year. Is there more steam left?

What's Behind the Rally in Wipro Shares? (Views On News)

May 31, 2021

Wipro shares outperforms TCS and Infosys over the past year. Is the rally justified?

Happiest Minds Q4 Results: Profit Grows Over Six-Fold; Company Eyes 20% Organic Growth in FY22 (Views On News)

May 14, 2021

Key takeaways from Happiest Minds Technologies Q4FY21 results.

L&T Technology Shares Fall After Q4 Results. What Should Investors Do? (Views On News)

May 5, 2021

Despite strong deal wins and a low base in FY21, a big turn-off for investors was the muted FY22 revenue growth guidance.

More Views on News

Most Popular

What is EBITDA & EPS?

Here's a breakdown of what EBITDA margin means and why it is important as a valuation metric for investors.

Hotel Stocks Will Reward Investors (Fast Profits Daily)

Jun 8, 2021

This is why I'm bullish on the hotel and hospitality sector.

My 'Unlock' Investments (Fast Profits Daily)

Jun 11, 2021

The best unlock investments you can make in the market.

The Most Visible Sign of India's Revival is on Two Wheels (Profit Hunter)

Jun 9, 2021

Investing in the best stocks could result in wealth compounding on a massive scale.

How I Discovered a 400-Year-Old Open Secret to Extreme Wealth (Profit Hunter)

Jun 11, 2021

Charlie Munger's open secret about investing success.


India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms


Jun 18, 2021 (Close)