For many years TCS managed to outshine Infosys in terms of margins, profit growth, top-line growth and in terms of attrition. There is surely a change in Infosys since Vishal Sikka has taken over at the helm. Even as TCS seems to be faltering in terms of growth and margins, Infosys is managing to beat the street. The December quarter has just highlighted that. So what are the key takeaways?
Size matters, or does it?
In terms of revenues and market cap, TCS is much larger than Infosys. TCS annual revenues at around Rs.27,000 crore is almost twice the revenues clocked by Infosys. Also in terms of market cap, TCS has been the only Indian company to have a market cap in excess of Rs.500,000 crore, although that market cap has slipped of late. Even in terms of market cap, Infosys has traditionally been half of TCS. What actually changed for Infosys in the last two quarters is the revenue growth overtaking TCS. Since 2010, TCS was clocking higher revenue and profits growth compared to Infosys. Things have only changed in the last 2 quarters. While in the first quarter of this fiscal, Infosys had marginally higher revenue growth, that difference became sharper in Q2. The third quarter has only served to underscore the difference in growth between TCS and Infosys. And the momentum seems to be shifting surely towards Infosys.
Watch out for OPMs…
The operating margins of Infosys are still lower than TCS. But the gap has been compressing fast and is just about 1.5%. The growth in margins in the last quarter is what stands out. The OPM of Infosys at 25.6% has grown at 150 bps in a single quarter, while TCS grew by just about 80 bps. Also the quality of margins was much better at Infosys. For example, the OPMs of TCS were substantially driven by currency depreciation and only a small part by operating efficiency. In case of Infosys the rise in margins has been largely driven by operating efficiency.
Reining in attrition at Infosys…
For a long time, the big difference between Infosys and TCS was the way they handled attrition. Of course, Infosys attrition at around 19.8% continues to be higher than TCS but the gap is reducing. Infosys has managed to maintain its attrition below 20% for the last 5 quarters in succession, although this is still work-in-progress. On the contrary, the attrition at TCS has gone up from around 12% to 16% in the last 5 quarters. That is probably the biggest differentiator that Infosys has managed to achieve. Of course, Infosys still has the task of cutting down attrition in absolute terms. So, surely Infosys has been getting smarter and that is showing in their relative price performance in the recent past.