TCS vs. Infosys: What do the CEOs' say? - Views on News from Equitymaster

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TCS vs. Infosys: What do the CEOs' say?

Jul 11, 2013

When it comes to investing, we have always stressed on the importance of doing your own homework on the company before investing in it. While doing so, it is imperative for investors to go through the annual reports of companies in which they are keen on putting money. Taking a step forward, Robert Olstein, a noted value investor in his own right has a knack of going through CEOs' letters to shareholders of companies. In an article written for Morningstar last year, he has encouraged all investors to critically read and comprehend the "glossy" CEO letters to shareholder at the beginning of each annual or quarterly report. Olstein argues that the letters can contain significant or vital information that can be uncovered by scrutinizing them closely.

So what should one look out for in these statements/letters?

Olstein says that he is looking for "heat" or "trigger words" that may indicate a significant fact that is either being omitted or may provide a warning to an upcoming change. He acknowledges that the difficulty of investing in the last few years should have the effect of encouraging investors to go the extra mile by reading these letters. Further, he states that there's an edge to reading them regardless of the economic headwinds at any particular time. Over the years, he has developed a questionnaire, probing some relevant points.

We have taken recourse to this questionnaire in analysing two IT majors, TCS and Infosys. Our objective is to compare and contrast the views of the respective CEO's in the current environment. Our intention is to provide information to the reader so that he can decide for himself as to which company is better on this front.

The following table illustrates the responses from TCS and Infosys with respect to each of those questions:

S.No. Questions TCS Infosys
1 Does management or the CEO discuss financial strength? Yes Yes
2 Does the CEO address debt levels?  NA NA
3 Is cash flow addressed?  No No
4 Is cash addressed?  No Yes
5 Are cost controls considered or addressed?  No No
6 Do they indicate how they intend to mitigate the economic headwinds
for their specific company? 
Passing reference No
7 Is the CEO forthright and honest in discussing company problems?
Do they talk about any blunders created by management? 
No No
8 Is there a discussion on capital or return on invested capital?  No No
9 Is there a discussion on goals?  Yes Passing reference
10 Does the CEO talk about the competition?  No No

While all the above questions are of equal relevance, given the IT industry's structure and operating parameters, we think two questions are of prime importance in the current environment. Those are question numbers, 6 and 7.

Based on the above questionnaire, we note that Infosys's CEO, Mr S.D. Shibulal has not discussed anything about how the company intends to mitigate the economic/regulatory headwinds. Further, he has also not been forthright in discussing the current problems that Infosys has been facing. TCS's CEO, Mr N Chandrasekaran has also made a passing reference about how TCS is intending to mitigate the economic and regulatory headwinds without going into the details.

To conclude:

On an overall basis we find that out of the 10 questions explored for the two companies, 1 question is not applicable while 6 questions have been answered in the negative. The results lead us to conclude that the CEO letters of both TCS and Infosys should contain more disclosures. While both CEO's have highlighted their achievements, they have shied away from discussing the disadvantages posed to their respective companies, which we do not consider as a good sign. One can argue that the 'Management Discussion and Analysis' of each of these companies answers most of the questions to a fair degree. However, on comparing the CEOs' letters with the CEO's letter of IBM, which can be considered as a good international peer, we find that there is room for improvement.

We would like to state that like every other checklist one needs to remember this is just the starting point of one's analysis. One still needs to analyse the performance record, management credibility and future prospects before making the final buying or selling decision


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1 Responses to "TCS vs. Infosys: What do the CEOs' say?"

Phaneesh

Jul 12, 2013

Don't be so harsh on Indian IT cos. They need to be compared with other companies within India. They are far better isn't it?
Why don't you compare how RIL reports vs BP/Shell etc?

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