The Indian IT industry is one of the leading destinations in the world for the services sourcing business. According to the India Brand Equity Foundation (IBEF) report, it accounts for approximately 55% of the global IT services industry market share.
In India, the industry accounted for 8% of the GDP in 2020.
The major players in this rapidly growing industry are Infosys and Tata Consultancy Services (TCS).
In this article, we compare the two companies on the basis of business operations, financial performance and future growth prospects.
Infosys is one of the leading Indian IT services companies offering traditional and digital IT and consulting services.
The company’s digital services-related capabilities in cloud computing, the internet of things (IoT), big data and analytics, and artificial intelligence (AI) are ranked the best in the industry.
The key business verticals for Infosys are financial services, retail, communication, energy and utilities, and manufacturing.
TCS is a part of the Tata group. It has been offering IT services, business solutions and consultancy services for the past 50 years.
The company holds a leading position among Indian players in the IT services space. It provides outsourcing, has a diversified client base and offers a wide range of services.
The key business verticals for TCS are the same as Infosys, barring manufacturing. The company instead has a life science and healthcare division.
Both the IT giants are competing for market share in similar segments. They are also actively securing new deals in each of the key verticals.
Single-digit revenue growth (CAGR)
In the last five years (2017-2021), revenue for Infosys and TCS grew at a CAGR of 8% and 7%, respectively.
Though Infosys has a higher CAGR, TCS is leading in terms of revenue. The revenue of TCS is 1.72 times that of Infosys.
The revenue growth for Infosys was driven by the technology, energy, and utility industries. On the other hand, the revenue growth for TCS was led by the life science and healthcare division.
Higher margins backed by lower expenses
Both TCS and Infosys have healthy operating profit margins as they have kept their expenses low. The five-year average operating profit margin (OPM) for TCS and Infosys stand at 27% and 25.8% respectively.
As we can see, TCS is leading in this category.
With respect to the bottomline, Infosys’ net profit has grown at a CAGR of 6% against a 5% growth for TCS in the last five years.
However, in terms of net profit margins, TCS seems to be leading again with five year net profit margin at 21.2%, against 20% of Infosys.
In the IT sector, employees are invaluable assets. Companies have to continuously invest in their employees to ensure their growth along with the company’s growth. A dissatisfied employee’s productivity is usually low which can lead to attrition.
When assessing the human capital of a company, there are two employee metrics to look at – revenue per employee and attrition.
In the financial year 2021, the revenue per employee for Infosys and TCS stood at US$ 55,200 and US$ 45,300, respectively.
While TCS saw a degrowth in revenue per employee by 8% during the year, Infosys saw a 2% increase in this metric.
Even though the number of employees at TCS are almost double the number of employees at Infosys, the company’s attrition levels are the lowest in the industry.
The attrition rate for TCS stood at 7.2% during the financial year 2021 compared to that of Infosys which stood at 15.2%.
These levels have gone up in the September quarter of 2022 due to increased demand for IT and supply tightness in niche skill areas. The attrition rate for
Infosys and TCS in the September quarter of 2022 stood at 20.1% and 11.9%, respectively.
The companies have also seen an increase in sub-contracting costs due to high attrition levels.
Shareholder payout through buybacks and dividends
Infosys and TCS have bought back shares worth Rs 30,460 crore and Rs 48,000 crore respectively from the market in three different transactions in the last five years.
The reason stated for the buybacks is to return excess cash to the shareholders.
A company generally carries out a buyback if it feels the share price is undervalued. When it buys back its shares, the earnings per share (EPS) rises. As a result, the price to earnings ratio (PE) falls, making it an attractive investment.
A buyback is also a preferred route if the company sees good growth in the near future and wants to retain profits instead of distributing to its shareholders.
A company distributes its profits to its shareholders in the form of dividends. Dividends can be in the form of cash or stock.
The five-year average dividend yield for Infosys and TCS is around 2.9% and 2.1% respectively.
Even though the dividend yields are low, the average dividend payout in the last five years for Infosys and TCS is pretty decent at 55.1% and 48.2%, respectively.
Return on equity
Return on equity (ROE) measures how efficiently the company is using its equity capital.
The average ROE for Infosys and TCS in the last five years stands at 23.9% and 33.8%, respectively. TCS has been more effective in terms of generating returns for its shareholders than Infosys.
The Price to Earnings ratio (P/E) and Price to Book Value (P/BV) are valuation ratios that help in determining whether the company’s share price is overvalued or undervalued.
The P/E ratio indicates how much an investor is willing to pay for one rupee of earnings. A high P/E ratio indicates the shares are trading at a premium.
The P/BV ratio measures the market valuation of a company to its book value. A high P/BV ratio indicates the share is overvalued.
The P/E and P/BV ratios of Infosys stood at 29.9 and 7.6, respectively, for the financial year 2021. For the last five years, the average stands at 19.8 and 4.4.
For TCS, the P/E and P/BV ratios stood at 35.6 and 13.4, respectively. The five year average is 23.8 and 7.1.
Both the shares seem slightly overpriced when compared to their five-year averages.
Both Infosys and TCS have acquired quite a few companies to strengthen their client services across all verticals.
In the financial year 2021, Infosys acquired GuideVision, Kaleidoscope Animations, Inc, Beringer Commerce Inc., and Beringer Capital Digital Group Inc.
The company has spent close to Rs 14.7 bn on these acquisitions.
Meanwhile, TCS acquired Pramerica in 2020. BridgePoint, and W12 Studios were acquired in the last five years.
Impact of Covid-19 on business
Infosys and TCS saw their revenue growth slow down in the first quarter of the financial year 2021 on account of the pandemic.
The net profit in the first quarter was also affected.
Both the companies saw termination or postponement of client projects as their business was negatively affected. They saw a rise in unanticipated costs relating to keeping the work environment safe and enabling work from home to its employees.
However, by the end of the financial year, the company saw business rebound as the pandemic forced enterprises to lean on technology and digitally transform their business.
This put Infosys and TCS in a sweet spot as they were able to fulfil client needs.
Both the companies are expecting to capitalise on the rising demand for IT services. The number of deals the companies secured post-pandemic have also increased, indicating good growth prospects.
Infosys expects demand from its clients in digital, cloud, and data. This expectation is backed by the huge deal successes they had in the financial year 2021.
The company expects to grow its revenue at 12-14% in the current financial year.
In 2018, the company adopted a four-pronged strategy to drive value creation. Scaling their digital presence, strengthening their core, and reskilling their workforce and localisation has led to an increase in their digital revenues and increased the deals they are securing since 2018.
For TCS, the top management feels that the pandemic has been the catalyst to appreciation and urgent adaptation of cloud platforms.
This is an enormous opportunity for TCS as it has invested in research and innovation, upskilling its employees, intellectual property, and partnerships.
These investments might finally pay off and help them gain a considerable market share in this opportunity.
In the March 2021 quarter alone, the company secured 30 deals, making it the leader among its peers. Infosys, on the other hand, could secure only nine deals in the quarter.
We reached out to Tanushree Banerjee, Co-head of Research at Equitymaster to ask her view on both companies. Here’s what she had to say …
While Infosys and TCS would be more or less at par when it comes to their financial performance in the immediate future, the real game changers will be the companies’ investments in new technology innovations and startups.
These investments could give the fortunes of one of these companies a massive edge over the other, in the next few decades.
How The Two Companies Have Fared
In terms of revenue and profit growth, Infosys has a better edge than TCS. However, in terms of profit margins, TCS is leading.
With the increasing demand for IT services in the post-pandemic era, retaining manpower will be crucial. TCS is doing a better job at retaining its employees. It continues to enjoy lower attrition levels in the industry.
TCS is also leading in the deals it has secured in the last quarter of the financial year 2021. A strong deal pipeline of TCS indicates good growth in the medium term.
However, in terms of valuations, TCS looks overpriced than Infosys. But the gap in their valuations isn’t very wide.
Fundamentals and valuations play an important role in deciding which company is suitable for investment. So take a close look at these parameters before you choose the stock to invest.
(This article is syndicated from Equitymaster.com)
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)