Infosys vs TCS: What was a battle of equals in 2009 is barely a competition today

"TCS' market capitalisation was 15 percent higher than Infosys based on the respective closing prices as on August 25, 2004," the analyst said.

For the next 6 years, Shah pointed out, TCS' market cap ranged between 63-122 percent of Infosys', with the low of 63.5 percent coming in March 2009, a year when TCS faced major currency-related pressures.

These pressures led to a meager 3 percent growth in earnings per share, despite the company's EBITDA rising 26 percent because of rupee depreciation. TCS' dollar revenue that year fell 6.8 percent.

Over the last 10 years, Infosys' share price has appreciated 236 percent to Rs 1,309.10, as on July 13, while TCS' share price has shot up by 930 percent to Rs 1,981.25.

TCS currently trades at a 35 percent premium to Infosys, particularly because of its large-scale, broader geographic mix and consistency in execution.

Both IT majors recently announced their earnings.

Tata Consultancy Services started off its financial year 2018-19 on a strong note as June quarter earnings beat analyst expectations. Profit grew by 6.3 percent sequentially to Rs 7,340 crore during the quarter.

Its peer Infosys began the year on a mixed note as Q1 bottomline and operational numbers missed analyst estimates while revenue and FY19 guidance met expectations. Profit for the quarter ended June 2018 fell 2.11 percent QoQ to Rs 3,612 crore, which was partly hit by reduction in the fair value of disposal group held for sale in respect of Panaya.

TCS' revenue from operations during the quarter increased 6.8 percent to Rs 34,261 crore and dollar revenue grew by 1.6 percent quarter-on-quarter to $5,051 million while constant currency revenue growth stood at 4.1 percent QoQ, the highest in last 15 quarters.

At the same time, Infosys recorded 5.77 percent sequential growth in revenue to Rs 19,128 crore and revenue in dollar terms increased 0.92 percent sequentially to $2,831 million and grew 2.3 percent in constant currency.

TCS' earnings before interest and tax (EBIT) jumped 5.3 percent sequentially to Rs 8,578 crore but margin contracted 36 basis points to 25.04 percent due to wage hike.

Infosys' EBIT rose 1.5 percent sequentially to Rs 4,537 crore but margin contracted 100 basis points to 23.7 percent for the quarter ended June.

Here are experts' views on their performance during 2009-2018 and outlook:

Harit Shah, Senior Analyst - IT, Reliance Securities

> For Infosys, FY09 EBITDA rose 37 percent YoY, while net profit rose 28 percent YoY, with Other Income also seeing a decline for the company (-32.8 percent), though owing to better forex management, the impact was not as bad as was seen for TCS. USD revenue growth was also superior to TCS, at 11.7 percent.

> Thus, from August 25, 2004 till March 3, 2009 (the day TCS' market capitalisation hit its lowest relative to Infosys after listing), TCS' stock gave around -2 percent CAGR stock return (market cap on March 3, 2009 was 8 percent below its listing market cap), compared with 12.1 percent returns for Infosys and 11.9 percent returns for the Sensex.

> However, since then, TCS' stock has seen a stellar performance relative to Infosys, as recovery in earnings, improving global economic environment post the 2008 meltdown, strengthening of its sales and delivery engines, strong leadership and stable management team has driven much improved financial performances, superior to Infosys for the most part.

> Thus, from a low of just 63.5 percent of Infosys' market capitalisation on March 3, 2009, TCS' market capitalisation on Friday, July 13, 2018 closed at >2.6x that of Infosys (265 percent)!

Revenue Outperformance: 175 percent of Infosys versus 129 percent in FY09

> It should be noted that in as many as 7 of the 9 fiscal years from FY10-FY18, TCS' USD revenue growth was superior to that of Infosys, and the IT major has clocked 13.7 percent USD revenue CAGR over FY09-FY18 compared with just 9.9 percent CAGR for Infosys. TCS' FY18 USD revenue is thus nearly 75 percent larger than that of Infosys vs a difference of less than 30 percent in FY09.

EBIT Margin: Infosys >590 bps versus TCS then, TCS >50 bps vs Infosys today

> The superior operating performances of TCS have also led to a substantial change in EBIT, EBIT margin and earnings differential between the 2 IT majors. It must be said, the figures and level of out-performance is quite extraordinary.

> In FY09, Infosys' EBIT margin was as high as 29.6 percent, way above that enjoyed by TCS, at 23.7 percent, a difference of nearly 600 bps! Even though TCS was around 29 percent larger than Infosys in terms of USD revenue, TCS' EBIT in absolute terms was nearly equal to that of Infosys, being higher by just 2.8 percent.

> Cut to the present FY18, and TCS' EBIT margin is actually 50 bps higher than that of Infosys (24.8 percent versus 24.3 percent), and in absolute terms, TCS' EBIT is 78 percent higher than that of Infosys. TCS has clocked an 18.5 percent EBIT CAGR over FY09-FY18, compared with 11.5 percent CAGR for Infosys over the same period.

> A combination of management issues at the top, impacting revenue growth, inferior operational efficiency and pricing pressure has led to the steady reduction in Infosys' EBIT margin over this period (down 530 bps in FY18 versus FY09), whereas management stability, superior operating performance and scale has ensured that TCS' FY18 EBIT margin is actually higher by a good 110 bps versus FY09.

Net Profit: Infosys 115 percent of TCS then, TCS 161 percent of Infosys today!

> Infosys' net profit was actually over 15 percent larger than that of TCS in FY09, owing to better forex management.

> Since then, owing to factors mentioned above, TCS has clocked a robust 19.6 percent PAT CAGR over FY09-FY18, while Infosys has managed only 11.6 percent CAGR over the period; TCS' PAT has grown 5x since FY09, while for Infosys, the figure is 2.7x.

> As a result, TCS' PAT is 61 percent larger than that of Infosys in FY18.

> We expect the IT major's strong processes, execution engine and operational efficiency to drive its performances going forward as well, given that these factors are structural and give it a competitive advantage versus peers.

We currently have Buys on both Infosys and TCS.

Ashish Chopra, VP – Research (IT sector), Motilal Oswal Institutional Equities

We believe that TCS currently enjoys a stronger business momentum given the lead it has taken in large deals. This should help it open up a gap to peers for the next few quarters.

That said, its premium valuations capture the same fully.

While Infosys may lag for now, we expect it to close some of this gap as stable leadership lays its focus on execution. That should help drive convergence in valuations too, as PE multiple of Infosys reduces the difference to that of TCS.

We have a Buy rating on Infosys with a price target of Rs 1,550 and Neutral rating on TCS with a price target of Rs 1,950.

Sumit Bilgaiyan, Founder, Equity99

Infosys lost its charisma when Nandan Nilkeni left the company. I think that was the turning point. From starting Infosys has been run by professionals but when it comes to transition it fails miserably.

Vishal Sikka, Kris Gopalakrishnan were good engineers and though leaders but they have failed to lead Infosys. On the other side, TCS has slowly kept its growth momentum through its journey.

It saw superb transition from Subramaniam Ramadorai to Natarajan Chandrasekaran to current management. TCS is also professionally run company where it is backed by Tatas.

Thinking ahead of the industry, beating the guidance and reward shareholders handsomely for which Infosys was known about. TCS adopted all these things in its journey. TCS has better cash flow and more visibility on growth side than Infosys.

We have a Buy rating on TCS with target price of Rs 2,150 while we have Hold rating on Infosys with a target price at Rs 1,335 till clarity emerges on the growth front.

Niharika Ojha, Research Analyst (IT sector), Narnolia Financial Advisors

Post-2009-10 slowdown in deals and pricing pressure, Infosys adopted strategy to look at growth without sacrificing margin while TCS focused on broad-based growth.

It triggered market share gains for TCS, its sales were 1.28 times that of Infosys in FY09 and now it is 1.74 times.

Due to higher valuation now the rating for TCS is Neutral and price target Rs 2,100. For Infosys, the rating is Buy with price target of Rs 1,445 per share.

Madhu Babu, Research Analyst - Institutional Equities, Prabhudas Lilladher

We believe that TCS outperformance has started post N Chandra taking over as the CEO of the company. Till then TCS was underperforming Infosys on revenue growth as well as margins.

TCS used to trade at 25 percent discount to Infosys. However, Chandra has led TCS witness a steep improvement in growth as well as enable TCS achieve margin leadership in the sector.

This has enabled TCS attain even leadership on valuation. TCS trades at 35 percent premium to Infosys owing to large scale, broader geographic mix and consistency in execution.

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