Everyone loves TCS right now and it’s almost fashionable
to hate Infosys. Almost every second analyst would tell you there is a great
pair trade in ‘Buy TCS, Sell Infosys’ and two weeks later would tell you ‘See I
told you so’. So let’s just look at some of the numbers and emphasize the
extent of TCS’s dominance over Infosys in recent times.
When TCS listed 8 years back, its market cap and
valuations were around 20-25% lower to Infosys, which was well deserved despite
TCS being the largest IT company by revenues even then. And that’s because
Infosys had a long trading history – had been one of the blue eyed boys of the
share markets and always deserved a premium over peers.
Over the next few years, Infosys and TCS were in a battle
for the top market cap position in IT stocks and the lead changed hands some 4
or 5 times by 2010. It’s in late 2010, that TCS established a small lead and
from that point on, it’s just been about TCS.
In late 2010, both TCS and Infosys had market cap of
around Rs 1.75 lakh crores. As I write this, TCS has a market cap of 2.47 lakh
crores and Infosys is struggling around 1.29 lakh crore mark. Yes, that’s a
difference of 91%. In other words, TCS almost =Infosys+Infosys. TCS has more
market cap than Infosys and Wipro put together. TCS has more market cap than the
rest of the entire IT industry in India excluding Wipro. Yes, TCS is bigger
than Infosys+HCL Tech+Tech Mah+Mah Satyam+what you have.
And look at the valuation difference – TCS now trades at
18.5x one year forward earnings while Infosys is available at 13.5x one year
forward earnings. This is a valuation gap of 37%, highest ever enjoyed by TCS.
So why is the market still so bullish on TCS and so negative on Infosys? Well, for
starters, currently Infosys is not seen as a company that under promises and
over delivers as was the case till 2010. For last 2 quarters, it’s under
promising and hugely underperforming even that promise. The market didn’t like
it one bit that they have not given Q2 guidance. If there was one parameter
which used to distinguish Infosys over TCS, it was the ability of the
management to stick its neck out and give guidance.
But that’s just one part. Look at the quality of earnings
and the difference here in the data, apart from the obvious dollar revenue difference
which has been the research work of my colleague Diana Monteiro. So while TCS
has delivered 3% dollar revenue growth, Infosys has seen a contraction of 1%.
TCS has seen a volume growth of 5.3%, while Infosys has seen only 2.8%. Pricing
is down 1% for TCS, it’s down almost 4% for Infosys. Attrition is at 12% at TCS
and is at almost 15% at Infosys. Go to IITs and there is clear preference for
TCS over Infosys from students. What was inconceivable a few years back is now
a reality. Lot of students are not even applying for a job in Infosys.
Last quarter, I saw HCL Tech’s CEO almost take a dig at
Infosys and their strategy. This quarter TCS has come out with numbers on same
day as Infosys. Of course this could be a coincidence or it could be the TCS
management way of telling the world, who the boss really is. But as I said in
my opening lines, it’s now almost a fashion to bash Infosys and praise TCS. But
before you pronounce the death of Infosys, just remember this..........
Infosys is up almost
5525% in last 15 years. In 1997, if you had invested Rs 1 lakh in Infosys,
it would be worth Rs 56 lakh now – tax free since its long term capital gain. I
am no expert in predicting future earnings but it only takes 3-4quarters for
sentiment to change at times. For now, one thing is certain – the large
shareholders still believe in Infosys. Despite all its problems, 3 of the largest
investors in company viz LIC, Aberdeen and Oppenheimer have actually upped
their stake in the last quarter. This quarter’s data will be key to watch out
for, 3 months from now.
But this is not a 3 month or 6 month game. This is a long
term story. Let’s look at these numbers again in next 5 years. As I said,
picture abhi baaki hai mere dost.
Disclaimer: The author of this article does not invest/trade in stock markets including derivatives. His only exposure to stock markets is via the stock options given to him by his previous employers as part of his compensation
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