Why Infosys Can Overpower TCS In Near Term

by CXOtoday News Desk    Jan 14, 2016

fight

After a lackluster growth in some of its earlier quarters, IT major Infosys has finally surprised analysts with a better-than-expected earnings numbers in the last quarter. On the contrary, its biggest rival Tata Consultancy Services (TCS) has reported some fatigue after growing at a brisk rate over the past few years.

 

The second largest IT services provider in India is certainly showing signs of a revival under CEO Vishal Sikka who joined the company in June 2014. This has reportedly been the third consecutive quarter when Infosys reported better sequential growth in the dollar denominated revenue than TCS, which has been struggling to meet market expectations for the last six consecutive quarters. Some believe, if the trend continues, the day is not far away when TCS, the country’s largest IT provider, will lose the growth crown to Infosys.

 

 Vishal Sikka emphasized on its Aikido initiative (focus on design thinking, platforms and knowledge-based IT) launched in August 2015, while explaining the rationale behind the Infosys numbers. “We continue to see growing adoption of our Aikido services, bringing the power of intelligent systems, automation and software to amplify the skills and imaginations of our people. This combination helped us deliver encouraging results despite the traditional seasonality of the quarter and the additional headwinds, and will strengthen the execution of our strategy towards consistent profitable growth,” Sikka said in a statement.

On the other hand, Rajesh Gopinathan, Chief Financial Officer at TCS, told BusinessLine, “It’s a relatively muted quarter. There is no taking away from the fact that the quarter was lower than what we expected as well as what the overall market expected.” The key reason Gopinathan stated was the company’s diverse portfolio that once helped them sail smoothly through the slowdown period about four years ago. Hailing US as the only growth market, the company sees umpteen challenges from non-US markets like India too, coupled with Holiday seasons. Gopinathan also cautioned the company may face growth challenges in the next few quarters.

Taking all this into consideration, here are a few metrics that indicate the chances for Infosys to overpower TCS in the near term.

Revenue: TCS revenue growth over the three quarters is lagging behind Infosys. In all quarters barring one prior to that TCS, has lead the revenue growth. In fourth quarter of 2014-15, when TCS witnessed 1.1 percent decline in revenue, Infosys’ revenue fell a deeper 2.8%.

“Infosys’ results beat our estimates for the third successive quarter with CC revenue growth of 1.1% (about 2%, excluding one-off of 2Q) and only a 60bps fall in EBIDTA margins. While the Total Contract Value (TCV) of orders signed was lower due to spill-over, the pipe-line remains strong at $3bn,” Dipen Shah of Kotak Securities said in a statement.

Net profit: In the last three quarters, Infosys has been overdoing TCS. In Q1 2015-16, TCS had witnessed a 48 percent rise in net profit due to the Rs 2,628 crore employee bonuses given in the previous quarter. Needless to say, TCS’ net profit fell 3.3 percent, worse than Infosys’s 2.2 percent decline.

Attrition: A key challenge for all tech companies is attrition - an area Infosys was working on as a result of which it had witnessed a decline in employee churn this quarter. TCS has also seen a decline but a marginal one at that. Unfortunately thid had always been an area where TCS has commanded over the last three years over Infosys.

Clients: The momentum in client additions has been faster for Infosys. It added four clients in the $25 million and above basket in the December 2015 quarter compared with the previous quarter. TCS added two clients in $20 million and above bracket. Infosys mentioned that it bagged a renewal deal worth $600 million and inked three large deals after the closing of December quarter accounts. Its current deal pipeline is worth $2-3 billion.

These factors reflect that Infosys may show a greater traction in the near term compared with TCS. However, TCS Chief N Chandrasekaran dismissed such fears. “There is no such throne. I do not think about these things. These misses have been on the periphery. There is no reason that we will not do well. And we have no intention of not doing well,” Chandrasekaran told ET, adding that it was not a question of the pipeline but some of the deals we were expecting did not happen.

It needs to be mentioned that one area where Infosys is still lagging TCS is in its operation margins. In the post earnings interaction, the Infosys management said the lower realizations have impacted its margins in the quarter under review. Its margins declined to 24.9 percent during the quarter from 25.5 percent a quarter ago. “We believe that, newer initiatives like Zero Distance, Design Thinking, Automation, etc. will shore up the growth rates of Infosys and sustain margins over the longer term,” Shah said on the note.

However, analysts are not very upbeat about TCS margins as of now. Unless the company manages operating levers to sustain margin in the longer term, it may become challenging for TCS to remain on the top.