Infosys v/s TCS | Quantitative Comparison based on Q2 FY20 results

Comparison of Two Major IT Companies of India

Introduction

In this article, we are going to do a quantitative comparison of Infosys v/s TCS. Investors may prefer TCS to be a safer option over Infosys after the recent whistleblower complaints against the Infosys’s executives claiming unethical practices. Lets do a comparative analysis of these two major IT companies in detail.

Infosys v/s TCS | Quantitative Comparison

Overview of Q2 FY20 Results & Corporate Governance Issue at Infosys

Q2 FY2019-20 Results

The September 2019 quarter performance of Infosys affirms that the country’s second-largest software company appears to be on course to report a double-digit growth in dollar-denominated revenue for the current fiscal.
At a time when TCS (Tata Consultancy Services) is undergoing a deceleration in growth momentum, Infosys appears to be back on the growth track. A comparison of revenue on trailing 12-month (TTM) basis shows that revenue growth for Infosys improved to 9.5% in the September quarter from 7.7% in the year-ago quarter. Whereas for TCS, revenue growth (TTM) down to 8.1% from 10.2% in the said period.
Thus, in the quarterly results for Q2 FY2019-20, Infosys beat the market estimates. The revenue and profit growth as well as businesses growth momentum are improving from last 3-4 quarters.

Corporate Governance Issue in Infosys

According to the recent whistleblower complaints against the Infosys’s CEO claiming unethical practices, the CEO has compelled for the modification in the Revenue and Net Profit numbers of Infosys from last few quarters.
As a result of which, Infosys seems to post the steady revenue growth and a sustained momentum in the order flow from clients.
After the release of whistleblower complaint letter to board of directors of Infosys and U.S. Securities and Exchange Commission, the Infosys stock, on Tuesday 22nd October, has posted its biggest one day loss in six years to end at lowest level (fall of 16%).

Infosys v/s TCS – Comparison of Two Major IT Companies of India

In this quantitative comparison, we have covered the parameters like Market Capitalization, Market Cap to Sales ratio, P/E ratio, historical P/E ratio comparison, Sales growth, Net Profit growth and promoter holding etc.

Infosys v/s TCS | Quantitative Comparison — **Infosys v/s TCS – Quantitative Comparison**

Market Cap

The market capitalization of TCS is around Rs.7.75 Lakh Cr, while market capitalization of Infosys is around Rs.2.25 Lakh Crore.
According to the market cap, TCS is India’s second largest company after Reliance Industries Ltd.
In 1990-2000, market cap of Infosys was greater than that of TCS. But over the years, TCS has shown the dedicated and visionary leadership and became a market leader now. Thus the market cap of TCS is around 2.5-3 times that of Infosys as of today.

Market Cap to Sales Ratio

The Market Cap to Sales ratio indicates how the market is valuing every rupee of the company’s sales. Or in simple words, how much price is one willing to pay for every rupee of its sales. . It is generally used to compare the companies in the same sector.
For Infosys, Market Cap to Sales ratio is 3.18 and that of TCS is 5.09. What does it indicate? It means investors are ready to pay higher value for TCS for each rupee of sales by it than Infosys.
Market cap to sales ratio is preferred more over PE ratio because it does not take into account Interest and taxes or any non-cash items thus it cant be manipulated. But PE ratio can be manipulated as it takes into account non-cash items too.

P/E Ratio

Current P/E Ratio

The current P/E ratio of Infosys is 17.98 and for TCS, P/E ratio is 23.97. Thus, we can see than TCS is enjoying a good amount of premium valuation over Infosys.
The recent growth numbers of sales, net profit can be the contributing factors in the premium valuation of TCS or discounted valuation of Infosys.

Historical Average P/E Ratio

For Infosys, 3-years, 5-years and 10-years P/E ratios are 18.85, 19.41 and 20.28 respectively. On the other hand, for TCS, 3-years, 5-years and 10-years P/E ratios are 21.57, 23.02 and 22.46 respectively.
From the above, we can get the trend for P/E numbers for Infosys, that earlier the stock, was having a premium valuation of P/E around 20. But over the years, there is a decreasing trend in the Infosys’s valuation.
And after the recent whistleblower complaints against executives of Infosys for unethical practices, the stock has corrected by 16%. As a result, it is trading at a discounted valuation.

Sales Growth

For Infosys, 3-years and 5-years sales growth CAGR (Compounded Annual Growth Rate) is 9.81% and 10.52% respectively.
While for TCS, 3-years and 5-years sales growth CAGR (Compounded Annual Growth Rate) is 10.47% and 12.35% respectively.
TCS has achieved higher growth rate on sales than that of Infosys. It is the reason why TCS is having a premium valuation than Infosys.

Net Profit Growth

For Infosys, 3-years and 5-years Net profit growth CAGR is 4.2% and 7.45% respectively.
While for TCS, 3-years and 5-years sales growth CAGR is 9.52% and 10.55% respectively.
In case of Net profit growth, we can see TCS is outperforming over Infosys with an accelerated growth momentum.

Conclusion

The negative reactions on the Infosys stock may continue in the near term. So the company’s valuation discount may widen against TCS till clarity emerges on the current corporate governance issue in Infosys.
Thus, TCS is expected to widen its lead over Infosys after the recent whistleblower complaints against the Infosys’s executives claiming unethical practices.
TCS has historically traded at a premium because of better business model, size, higher margins and governance, however this premium narrowed post July 2019. But now, Investors may prefer TCS to be a safer option over Infosys. As a result, TCS will regain its earlier premium valuation in near future.