The see-sawing fortunes of TCS and Infy

Venkatesh Ganesh Bengaluru | Updated on January 20, 2018 Published on April 25, 2016

TCS chart

How the tech majors have responded to challenges by changing their biz approach

If one were to invoke a box office metaphor for two IT majors’ performance in the past, TCS was delivering consistent hits, while Infosys was an average grosser.

During fiscal years 2013 and 2014, indicatively, TCS grew at a scorching pace, beat Nasscom expectations regularly, and improved its brand value (by $3.04 billion in 2014).

However, somewhere in the second half of 2014, that hot streak seemed to have ended for TCS. It negatively surprised market watchers, a habit that Infosys got into a couple of years ago.

Flash forward to fiscal year 2016, and Infosys seems to have turned its fortunes around. CEO Vishal Sikka seems more visibly relaxed, and even his choice of words reflects an innate confidence. Analysts have begun to take note of the spring in Infosys’ stride. Prabhudas Lilladher Tech Analyst Govind Agarwal says that FY17 might see Infosys doing better than TCS.

The change

So, what has changed for both the companies? Well, for starters, the way the companies are approaching the business has changed. Infosys, for example, has not discarded traditional application development and maintenance kind of deals, but has given it a twist.

“How we can take an existing deal and integrate it with newer tech changes involving mobile, social media etc…. (That) is what will make us and the industry relevant going forward,” Sikka said in an interaction after the declaration of results.

He gave the example of a project being done with Toyota on driverless cars. This, in addition to new projects such as building the user interface of one of the hottest car makers, are examples of the new kinds of deals it is bagging, he said.

TCS, meanwhile, has also been bagging such projects. For example, a deal with GE to develope a new IoT solution on GE's Predix platform, involving Satellite Image Analytics, Supply Chain Monitoring, Prognostic Maintenance, and Engine Telematics.

While all this may sound interesting, both the companies and others in the $143 billion industry are finding it difficult to charge a premium, given that the global economy is still in slowdown mode.

“Cost takeaways are a given. The question staring at these companies is whether they can convince customers that there is value beyond cost,” says Peter Schumacher, CEO, Value Leadership Group.

This is where the issue of margins crop up. While Infosys surprised the Street with positive margins, with TCS it was the opposite. However, the margin profile keeps fluctuating every quarter, with companies willing to sacrifice, in order to hold on to existing customers or to gain access to new ones.

Margins issue

According to Urmil Shah, IT analyst, IDBI Capital, a drop in profit margins to the tune of 50 basis points for TCS was, however, a matter of concern especially since the impact of the December 2015 floods in Chennai was not a factor in the last quarter, and there had been gains from the rupee (an increase of 60 basis points).

TCS, however, said that this was due to investment in new service lines. For Infosys, margins came in at 25.5; CFO MD Ranganath indicated that it will be 24-26 per cent going forward.

Smooth road?

Some of the management commentary after the results suggests that the demand environment is stable, despite some stress in areas such as energy and utilities and pockets of financial services. For TCS, the 2016 fiscal was tough: it faced headwinds in sectors such as energy and BFSI, according to Sarabjit Kaur Nangra, IT analyst at Angel Broking.

TCS gets about 41 per cent of its revenues from this vertical and has been facing stress from its insurance vertical (it does not give a break-up of revenues from insurance). However, the management said business was improving and the vertical’s contribution went up 11.8 per cent in the most recent quarter.

Energy has been a bugbear for other IT companies such as Wipro as clients have reduced spending on IT and have even reduced the scope of some of their projects. For TCS, business from the energy vertical has started to improve. Its contribution went up by 16.8 per cent in the most recent quarter (overall 4.1 per cent of its business).

For Infosys, this vertical's contribution went up by 11 per cent (overall contribution of 4.1 per cent to its business). Digital business is an area that all companies seem to be bullish about. While Infosys does not give out revenues from that service line, for TCS, it contributed 15.5 per cent in the last quarter.

Published on April 25, 2016
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