Infosys and TCS: Currency & Subcontracting - 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 and TCS: Currency & Subcontracting

Aug 29, 2012

Background: In light of the uncertain global scenario, both Infosys and TCS continue to face volume and pricing pressures impacting revenue and net income growth. Add to these, a surprising element that Infosys, TCS and the Indian IT sector confront is related with increased subcontracting costs in the USA, thanks to the reluctance of the USA authorities in granting visa to Indian nationals deputed by the respective IT companies to work on onsite projects.

Although the rupee depreciation is becoming a stress factor for the Indian economy, if there is one export driven sector which continues to benefit hugely from this scenario, it's the IT sector. This article analyses the positive impact that the depreciating rupee continues to have on TCS and Infosys with particular reference to the last quarter's (1QFY13) result.

Chart1: Rupee depreciation vis-a-vis the US dollar (Source: Ace Equity)

The above chart shows the pattern and scale in which the rupee has depreciated vis-a-vis the US dollar from the end of August 2011 till the 28th of August, 2012.

Infosys: 1QFY13 has seen a sequential revenue decline of 1% in USD terms. A pricing decline of 3% has accompanied this although there was a volume growth of 2.7%. Our interest in finding out more about the impact of subcontracting cost reveals that subcontracting cost has increased by 47% Q-o-Q , standing at 3% of 1QFY13 revenue, compared to 2% of 4QFY12 revenue ( Infosys: IFRS Consolidated Financial Statement(USD) for 1QFY13).

Our quest to analyse the impact of depreciating rupee lets us to calculate and conclude that the rupee revenue for 1QFY13 would have been 87.529 bln instead of 96.062 bln (calculation made on the basis of 1QFY13 average currency rate) and this boon of approximately 10% has been good enough to vanquish the curses of pricing decline, higher subcontracting cost and volume growth below long term historical average.

TCS: 1QFY13 has seen a sequential revenue growth of 3% in USD terms along with a pricing decline of 1% and a relatively impressive volume growth of 5.3%. As with Infosys, we explore further on subcontracting costs, however, within the context of data published by TCS, we only infer that in FY12, the subcontracting costs has increased by approximately 47% over FY11 standing at 4.5% of FY12 revenue, compared to 3.8% of FY11 revenue. Disclosure limitations with respect to 1QFY13 results limit our ability to find out about more about the impact of subcontracting cost in the last quarter on a sequential basis, however, we understand from a recent article published in The Economic Times that the item has eaten up 5% of 1QFY13 revenue from less than 3% in the corresponding period a year before in line with Infosys, the rupee revenue for 1QFY13 would have been 136.3 bln instead of 149.6 bln, accentuating the relatively impressive 3% growth of revenue in USD terms.

Growth(Q-o-Q)InfosysTCS
Revenue (USD)-1%3%
Price(USD)-3%-1%
Volume2.70%5.30%
Subcontracting cost (USD)47%72%
Rupee depreciation10%10%
Table1: Summary table showing the Q-o-Q growth of revenue,
price, volume, subcontracting cost and rupee depreciation

Summary: Our analysis above thus reveals the beneficial impact that the depreciating rupee has had on the gross profitability of Infosys and TCS. However, the reader may question the sustainability of the positive impact provided by the rupee along with the negative effect of sub-contracting costs. While the reasons for the rupee depreciation can be primarily attributed to slowing reforms/political paralysis, fiscal and current account deficit, volatile portfolio flows, we believe that these are as transitory as the current fear prevailing in the USA about outsourcing. The new world which is being built on the principles of free trade and global competition, would make the US authorities move towards policies that discourage protectionism. Hence, the boon of rupee depreciation and the curse of increased subcontracting costs, may impact the share price performance in the near term, however, the long term investor would do well, if he worries less about these factors and focuses more on the inherent strength of Infosys and TCS and the IT sector as a whole. The high quality management present in most companies in the sector, particularly in Infosys and TCS would likely ensure that both Infosys and TCS are able to rise to the challenge and create more shareholder value in the long run, near term pressures notwithstanding.


Equitymaster requests your view! Post a comment on "Infosys and TCS: Currency & Subcontracting". Click here!

  

More Views on News

INFOSYS 2019-20 Annual Report Analysis (Annual Result Update)

Aug 5, 2020 | Updated on Aug 5, 2020

Here's an analysis of the annual report of INFOSYS for 2019-20. It includes a full income statement, balance sheet and cash flow analysis of INFOSYS. Also includes updates on the valuation of INFOSYS.

INFOSYS Announces Quarterly Results (1QFY21); Net Profit Up 12.4% (Quarterly Result Update)

Jul 16, 2020 | Updated on Jul 16, 2020

For the quarter ended June 2020, INFOSYS has posted a net profit of Rs 43 bn (up 12.4% YoY). Sales on the other hand came in at Rs 237 bn (up 8.5% YoY). Read on for a complete analysis of INFOSYS's quarterly results.

INFOSYS Announces Quarterly Results (4QFY20); Net Profit Up 6.3% (Quarterly Result Update)

Apr 21, 2020 | Updated on Apr 21, 2020

For the quarter ended March 2020, INFOSYS has posted a net profit of Rs 43 bn (up 6.3% YoY). Sales on the other hand came in at Rs 233 bn (up 8.0% YoY). Read on for a complete analysis of INFOSYS's quarterly results.

INFOSYS 2018-19 Annual Report Analysis (Annual Result Update)

May 21, 2019 | Updated on May 21, 2019

Here's an analysis of the annual report of INFOSYS for 2018-19. It includes a full income statement, balance sheet and cash flow analysis of INFOSYS. Also includes updates on the valuation of INFOSYS.

More Views on News

Most Popular

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

INFOSYS SHARE PRICE


Sep 24, 2020 (Close)

TRACK INFOSYS

  • Track your investment in INFOSYS with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks

INFOSYS - ZENSAR TECHNOLOGIES COMPARISON

COMPARE INFOSYS WITH

MARKET STATS