Friday, July 13, 2012


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