India’s IT industry is one of the world’s leading destinations for the service sourcing business. According to a report by the India Brand Equity Foundation (IBEF), it accounts for about 55% of the global IT services industry’s market share.
In India, the industry accounted for 8% of GDP in 2020.
The key players in this fast-growing industry are Infosys and Tata Consultancy Services (TCS).
This article compares two companies based on business operations, financial performance, and future growth prospects.
Infosys is one of India’s leading IT services companies offering traditional digital IT and consulting services.
The company’s digital service-related capabilities in cloud computing, the Internet of Things (IoT), big data and analytics, and artificial intelligence (AI) rank among the highest in the industry.
Infosys’ main industries are financial services, retail, telecommunications, energy and utilities, and manufacturing.
TCS is part of the Tata Group. For the past 50 years, we have provided IT services, business solutions and consulting services.
The company holds a leading position among Indian players in the IT services sector. We provide outsourcing, have a diverse customer base, and provide a wide range of services.
The main industries of TCS are the same as Infosys, except for the manufacturing industry. Instead, the company has a life sciences and healthcare division.
Both IT giants are competing for market share in similar segments. We are also actively securing new transactions in each of our major industries.
Single-digit compound annual growth rate (CAGR)
Over the last five years (2017-2021), Infosys and TCS revenues have grown at CAGR of 8% and 7%, respectively.
Infosys has a high CAGR, but TCS is the top in terms of revenue. TCS revenue is 1.72 times that of Infosys.
Infosys’ revenue growth was driven by the technology, energy, and utility industries. Meanwhile, TCS revenue growth was led by the Life Sciences and Healthcare sector.
Increased profit margin backed by cost reduction
Both TCS and Infosys keep costs low, so operating margins are sound. The average five-year operating margins (OPM) for TCS and Infosys are 27% and 25.8%, respectively.
As you can see, TCS leads in this category.
In terms of revenue, Infosys’ net income grew at a CAGR of 6%, compared to a 5% growth in TCS over the last five years.
However, in terms of net profit margin, TCS seems to be leading again with a 5-year net profit margin of 21.2%, compared to Infosys’ 20%.
Employees are an invaluable asset in the IT sector. Companies need to invest continuously in their employees to ensure growth as the company grows. Dissatisfied employees are usually less productive, which can lead to turnover.
When assessing a company’s human capital, there are two employee indicators to look out for. Revenue and turnover per employee.
In fiscal year 2021, Infosys and TCS earned $ 55,200 and $ 45,300 per employee, respectively.
TCS reduced revenue per employee by 8% during the year, while Infosys increased this metric by 2%.
TCS has almost twice as many employees as Infosys, but the company has the lowest turnover in the industry.
TCS turnover was 7.2% during the 2021 fiscal year, while Infosys turnover was 15.2%.
These levels rose in the September 2022 quarter due to increased demand for IT and tight supply in niche skills areas.Turnover rate
Infosys and TCS for the September 2022 quarter were 20.1% and 11.9%, respectively.
Both companies have also seen increased subcontracting costs due to high turnover rates.
Payment to shareholders through repurchase and dividends
Infosys and TCS have repurchased Rs 30,460 and Rs 48,000 worth of shares from the market in three different transactions over the last five years.
The reason for the repurchase is to return the surplus cash to shareholders.
Companies that feel their stock price is undervalued usually buy back. If you buy back your own shares, your earnings per share (EPS) will increase. As a result, the price-earnings ratio (PE) is reduced, making it an attractive investment.
If the company grows well in the near future and wants to maintain profits rather than distribute it to shareholders, buybacks are also a good route.
The company distributes profits to shareholders in the form of dividends. Dividends can be paid in cash or in the form of shares.
The average five-year dividend yields for Infosys and TCS are approximately 2.9% and 2.1%, respectively.
Dividend yields are low, but Infosys and TCS’s average dividend payments over the last five years are fairly decent at 55.1% and 48.2%, respectively.
Return on equity
Return on Equity (ROE) measures how efficiently a company is using its capital.
The average ROEs of Infosys and TCS over the last five years are 23.9% and 33.8%, respectively. TCS is more effective than Infosys in that it produces shareholder interests.
Price-earnings ratio (P / E) and price-to-book value ratio (P / BV) are valuation ratios that help you determine if a company’s stock price is overvalued or undervalued.
Price-earnings ratio indicates how much an investor is willing to pay for a return of 1 rupee. A high price-earnings ratio indicates that the stock is trading at a premium.
The price-to-book value ratio measures the market valuation of a company’s book value. A high P / BV ratio indicates that the share is overvalued.
Infosys’ price-earnings ratio and price-to-book value ratio were 29.9 and 7.6, respectively, in fiscal 2021. The averages for the last five years are 19.8 and 4.4.
For TCS, the price-earnings ratio and the price-to-book value ratio were 35.6 and 13.4, respectively. The five-year average is 23.8 and 7.1.
Both stocks appear to be slightly higher than the five-year average.
Both Infosys and TCS have acquired a significant number of companies to enhance client services across all industries.
In fiscal year 2021, Infosys will be GuideVision, Kaleidoscope Animations, Inc, Beringer Commerce Inc., and Bereringer Capital Digital Group Inc. Was acquired.
The company spent nearly Rs. 14.7 billion on these acquisitions.
Meanwhile, TCS acquired Pramerica in 2020. BridgePoint and W12 Studios have been acquired over the last five years.
The business impact of Covid-19
Infosys and TCS confirmed that the pandemic slowed revenue growth in the first quarter of fiscal year 2021.
First-quarter net income was also affected.
Both companies saw the termination or postponement of the client project due to the negative impact on their business. They saw an unexpected increase in costs associated with keeping the work environment safe and enabling work from home to employees.
However, by the end of the fiscal year, the business had recovered as the pandemic forced companies to rely on technology and digitize their business.
This made Infosys and TCS a sweet spot as they were able to meet the needs of their clients.
Both companies expect to take advantage of the growing demand for IT services. The number of transactions secured by companies after the pandemic is also increasing, showing good growth prospects.
Infosys expects demand from clients for digital, cloud, and data. This expectation is supported by the success of the large-scale transactions they completed in fiscal year 2021.
The company expects to increase revenue by 12-14% this fiscal year.
In 2018, the company adopted four strategies to drive value creation. By expanding our digital presence, strengthening our core, and re-skilling our employees and localization, we have increased our digital revenue and the transactions we have secured since 2018.
In the case of TCS, top management feels that the pandemic is a catalyst for cloud platform evaluation and urgent adaptation.
This is a great opportunity for TCS to invest in research and innovation and improve its employees, intellectual property, and partnerships.
These investments can ultimately pay off and help you gain significant market share on this occasion.
In the March 2021 quarter alone, the company secured 30 transactions and became a leader among its peers. Infosys, on the other hand, was able to secure only nine transactions this quarter.
Equity Master’s View
We contacted Tanushree Banerjee, Equitymaster’s co-investigator, for their views on the two companies. This is what she had to say …
Infosys and TCS are about the same in terms of financial performance in the near future, but the true game changer is a company’s investment in new innovations and startups.
These investments could give one property of one of these companies a significant advantage over the other in the coming decades.
How the two companies went
Infosys is superior to TCS in terms of revenue and profit growth. However, TCS leads in terms of profit margin.
As the demand for IT services increases in the post-pandemic era, it becomes important to maintain human resources. TCS is doing a better job of retaining employees. It continues to enjoy lower levels of decline in the industry.
TCS also plays a leading role in transactions secured in the last quarter of fiscal year 2021. TCS’s strong trading pipeline is showing good growth over the medium term.
However, in terms of evaluation, TCS seems to be too high over Infosys. However, the gap in their evaluation is not that wide.
Fundamentals and valuations play an important role in deciding which company is best suited for investment. Therefore, take a closer look at these parameters before choosing a stock to invest in.
(This article is syndicated from Equitymaster.com)
(This story has not been edited by NDTV staff and is automatically generated from the syndicated feed.)