Why the gap is widening in their valuations…

When the TCS and Infosys results for the first quarter were announced in July 2018, the differences in valuations were a lot starker. While Infosys struggled with BFSI, TCS leveraged its BFSI to drive growth. What you must be wondering is what justifies this sharp outperformance of TCS over Infosys?

Get a 10-year perspective…

Back in 2008, Infosys had a market cap that was 50% more than that of TCS. Currently, TCS is valued at $112 billion and its market cap is nearly2.6 times that of Infosys. In the quarter to June 2009, the quarterly net profits of TCS and Infosys were exactly at the same level. In the latest quarter ended June 2018, the net profit of TCS is more than twice that of Infosys. Back in 2009, Infosys had an EBIT margin of 34% while TCS had EBIT margins of 27%. Today, TCS is still at 27%, but Infosys EBIT margins are sharply down to just 25% in the last 10 years.

Consistency has been the key…

If you were to use one word to use describe the performance of TCS, it is consistency. Not only in maintaining sales growth and profit growth, but also in terms of margins, TCS has shown a lot more consistency compared to Infosys. TCS has managed a very clean transition during this period from Doraiswamy to Chandra and then from Chandra to Gopinath. Infosys has found itself in a leadership struggle when first Sibulal was brought in and was followed up by Murthy intervening to induct Kamath. Then there was that unsavory experience with Vishal Sikka. All these have raised serious issues of corporate governance which has resulted in investors assigning a much lower P/E multiple for Infosys. In fact, the P/E value gap between TCS and Infosys has now crossed 10X. Digital presence, revival in BFSI, stability and managing expectations will be the big challenges for Infosys in the day ahead!