Both TCS and Infosys reported moderate dollar revenue growth of 0.6 percent YoY and 6.1 percent YoY, respectively, in FY21, as both demand and supply were affected during the first half of FY21 due to the COVID-induced lockdown.
However, both companies reported strong sequential growth post the initial dip, and business prospects for the overall IT industry remain strong going ahead.
The FY21 annual reports of both these companies have thrown up some interesting insights into a couple of trends that have emerged during this pandemic. They are as follows:
1) Businesses are rapidly focusing on adopting digital technologies
2) Companies are focusing on achieving cost efficiency to increase their resilience and agility.
These developments present strong market opportunities for the IT industry. Companies are seeing this shift in technology as the beginning of a multi-year technology upgradation cycle. This should open up newer opportunities for technology-driven differentiation.
Healthy Deal Wins, and Hiring Trends
Citing the need for quick adaptation to new platforms, companies have increased their spending on technology. It has been a rewarding exercise as both - Infosys and TCS - have delivered an all-time high deal wins during the year. Infosys reported 56 percent growth in large deal wins of $14.1 billion, while the same for TCS was 17 percent YoY.
Adaptation of new technology would also open up the sector for fresh hirings. TCS added 40,000 new employees in FY21, the highest in the past 15 years. Infosys' headcount addition at 17,000 was the highest in the past nine years.
Companies would continue adopting work from home culture to keep the overall cost down and access talent in tier-II towns and cities at comparatively lower pay grades. TCS has adopted a policy till CY25 where it will not have more than 25 percent of its employees at its facilities at any point in time.
Balance Sheet Strength and Healthy Payout
Balance sheets of both the IT services companies remained strong and high on liquidity. Both companies have stepped up on dividends and buybacks over the previous 3 years. Despite that, their balance sheet remains highly liquid.
Cash and short-term investments form 29 percent of total assets in the case of TCS and 25 percent for Infosys. It is also at 3 percent of the market cap for TCS and 5 percent of the market cap for Infosys.
Free cash flow (FCF) growth for TCS was 22 percent, whereas payout was 95 percent of free cash flow. FCF grew 44 percent YoY for Infosys and payout stood at 94 percent. This translates into one of the highest returns of cash in absolute terms by both companies in any particular year.
With a strong debt-free balance sheet and free cash flow, TCS and Infosys would be in a prime position to utilize any acquisition opportunities arising from industry consolidation.
Enough levers to maintain margins
TCS expects demand, revenue, and operating costs to normalize and return to its long-term comfort zone. As revenues grow, operating leverage is likely to play out for TCS.
Infosys expects margin to remain resilient due to better business mix, operating leverage, and additional cost levers
Adopting to ESG Norms
Infosys has taken rapid strides when it comes to adopting the environmental, social, and governance (ESG) norms. The company has turned carbon neutral 30 years ahead of global guidelines. The company would be looking to extend its ESG footprint by upgrading the digital skills of over one crore people by FY25. It includes employees, clients’ workforce, students, teachers, and communities.
TCS is projected to be carbon neutral by CY50. The management is focused on following all major ESG guidelines set up internally by the Tata group.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.