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

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

  • MyStocks

MEMBER'S LOGINX

     
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

CYIENT Share Price Up by 14%; BSE IT Index Up 0.7% (Market Updates)

Jan 22, 2021 | Updated on Jan 22, 2021

CYIENT share price is trading up by 14% and its current market price is Rs 580. The BSE IT is up by 0.7%. The top gainers in the BSE IT Index is CYIENT (up 14.0%). The top losers are ECLERX SERVICES (down 0.1%) and TECH MAHINDRA (down 0.7%).

CYIENT Share Price Up by 6%; BSE IT Index Up 0.1% (Market Updates)

Jan 22, 2021 | Updated on Jan 22, 2021

CYIENT share price is trading up by 6% and its current market price is Rs 537. The BSE IT is up by 0.1%. The top gainers in the BSE IT Index is CYIENT (up 5.5%). The top losers are COFORGE and HCL TECHNOLOGIES.

ZENSAR TECHNOLOGIES Share Price Up by 5%; BSE IT Index Down 0.5% (Market Updates)

Jan 22, 2021 | Updated on Jan 22, 2021

ZENSAR TECHNOLOGIES share price is trading up by 5% and its current market price is Rs 249. The BSE IT is down by 0.5%. The top gainers in the BSE IT Index is ZENSAR TECHNOLOGIES (up 5.3%). The top losers are ORACLE FINANCIAL and SONATA SOFTWARE .

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.

Why Gold Hit Lower Circuit (Fast Profits Daily)

Jan 11, 2021

Were you shocked that bullion prices hit lower circuits on Friday on the MCX? Find out why it happened...

Time to Book Profits in Pharma Stocks (Fast Profits Daily)

Jan 15, 2021

In this video, I'll show you why it might be the right time to take money of the table in pharma stocks.

A Rare Chance to Invest in Potential Multibaggers in 2021 (Profit Hunter)

Jan 11, 2021

Our ace stock picker is ready to capitalise on a big growth opportunity.

Smallcap Stocks: Your Best Bet for 2021 and Beyond (Profit Hunter)

Jan 15, 2021

The pandemic failed to thwart Richa's investing success formula for 2020.

More

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

S&P BSE IT


Jan 22, 2021 (Close)

S&P BSE IT 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS