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Infosys or TCS: Which is better investment bet in IT sector?

Last updated on: November 16, 2011 18:43 IST

Infosys or TCS: Which is better investment bet in IT sector?

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Salil Dhawan, Investment-Mantra.com

Infosys and TCS are considered to be the backbone of the information technology sector in India. There is a great deal of competition between them in terms of manpower, revenue, profitable deals and the profits gained.

We evaluate both the IT majors as against recent growth parameters. Read on.

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Courtesy: Investment-mantra.in



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About Infosys

Infosys Limited was started in 1981 by seven people with US$ 250. Today, the company is a global leader in the "next generation" of IT and consulting with revenues of US$ 6.604 billion.

Infosys defines designs and delivers technology-enabled business solutions for global 2000 companies. Infosys also provides a complete range of services by leveraging our domain and business expertise and strategic alliances with leading technology providers. The company offerings span business and technology consulting, services, systems, product engineering, custom software development, maintenance, re-engineering, independent testing and validation services, IT infrastructure services and business process outsourcing.

Infosys has a global footprint with 64 offices and 65 development centers in US, India, China, Australia, Japan, Middle East, UK, Germany, France, Switzerland, Netherlands, Poland, Canada and many other countries. Infosys and its subsidiaries have 141,822 employees as on September 30, 2011. The company takes pride in building strategic long-term client relationships. 98.5 per cent of its revenues come from existing customers (Q2 FY 12).

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Image: The Infosys Leadership Institute at the company's Mysore campus.

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Infosys or TCS: Which is better investment bet in IT sector?

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About TCS

Tata Consultancy Services is an IT services, business solutions and outsourcing organisation that delivers real results to global businesses, ensuring a level of certainty that no other firm can match.

TCS offers a consulting-led integrated portfolio of IT and IT-enabled services delivered through its unique Global Network Delivery Model (GNDM), recognised as the benchmark of excellence in software development. TCS is part of the Tata group, one of India's largest industrial conglomerates and most respected brands.

TCS has over 198,500 of the world's best-trained IT consultants in 42 countries. TCS had revenue of $8.2 billion (fiscal year ending March 31, 2011).

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Image: TCS' Hyderabad campus.

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Infosys or TCS: Which is better investment bet in IT sector?

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TCS and Infosys: Latest financial results

TCS results in the last quarter were not spectacular. In comparison with Infosys, TCS had a higher revenue growth while profits have fallen. On the revenue front, in recent times TCS has show more consistent earning visibility than Infosys though in the last quarter TCS revenue growth of 7.7 per cent came in slightly lower than expectations (compared to consensus Bloomberg estimates -- Indian GAAP), its net profit declined by 4.7 per cent to Rs 2,301 crore (Rs 23.01 billion), compared to the June quarter.

This was contrary to expectations of 4.2 per cent sequential growth in the net profit. Volume growth stood strong at 6.25 per cent for the quarter, in line with expectations.

Infosys Q2 (FY 2012) beat expectations substantially with a consolidated net profit came in at Rs 1,906 crore, up around 11 per cent as compared to Rs 1,720 crore in previous quarter (Q1 FY-2012). The company's revenue was up around 8.2 per cent in the quarter to Rs 8,099 crore vs Rs 7,485 crore during the same period.

Earnings per share for the July-September quarter of 2011 was at Rs 33.3 as against Rs 30.14 in the previous quarter.

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Infosys or TCS: Which is better investment bet in IT sector?

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Evaluating Infosys

Strengths:

  • Large enterprise focused, like JP Morgan, Bank of America, Microsoft, BT, BP, Goldman Sachs
  • Strong domain capability in enterprise (BFSI, manufacturing, telecom, retail) and ERP services
  • Better positioned in consulting, which it has built over the years and brings in about 20 per cent revenue
  • Better basket of services, with presence in growth verticals

Weakness:

Very small focus on India and emerging markets, the growth engines of today

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Image: Infosys Leadership Institute.

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Infosys or TCS: Which is better investment bet in IT sector?

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Evaluating TCS

Strength:

  • Strong applications, development and maintenance
  • Strengthened BPO post Citibank's back-office buy
  • Global footpr#8747 present in over 50 countries
  • Strong India presence, growing in emerging markets
  • Stable management team

Weakness:

  • In the past few years, Infosys and Wipro have started operations in Latin America, earlier a key differentiator for TCS
  • A workforce of nearly 2 lakh makes it India's largest private employer by far. Despite its new structure, the head count is a huge challenge

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Image: TCS CEO and MD N Chandrasekaran.
Photographs: Reuters
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What's in store for them in future?

Debt ridden Europe, a hurting US, potential slowdown in China -- all point to a tough couple of quarters ahead for both the IT majors. In such uncertain times, company like Infosys always gives muted guidance and outperforms it.

Having said that Tata Consultancy Services (TCS) in recent times has raced ahead of Infosys. This polarisation becomes even more visible during a slowdown. In a bid to weather the difficult situations and looming economic uncertainty in US and European regions, TCS has realigned its workforce and is expected to deliver growth further too.

While TCS is expecting a sound demand for its services, Infosys, on other hand, warned against slower client spending. A massive top-level restructure at Infosys is also considered as one of the reasons to lag behind in the race. The transition and the exits of key managers have extended an opportunity to TCS for further increasing their lead.

Tata Consultancy Services, on the other hand may have been the oldest and biggest player, but it was seen as the industry's stodgy stepchild. Now TCS is becoming the sector's yardstick.

After Natarajan Chandrasekaran, took over the reins two years ago, his charisma and performance are giving TCS a hugely marketable public face. At Infosys, at the same time, the legendary N R Narayana Murthy and Nandan Nilekani -- have moved on, clearing the field for the next generation. Under its new leader, TCS' market value has doubled.

Revenue rose 25 per cent to $8.4 billion in the last fiscal year ended March 31, 2011. Net profits jumped 30 per cent in that period to $2 billion and over the last 12 months its share price has outperformed all of its Indian rivals.

Perhaps a bigger challenge which remains for TCS is building a track record of finishing big projects on time without incident while for Infosys challenge will be to re-invent itself and wait for their revamped management to push a new plan. The challenge here, of course, would be to recoup the momentum.


Photographs: Reuters
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