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Three cheers for IT

Arun Rajendran | October 18, 2004

Recognition and interpretation of sensory stimuli are based on memory while insight and intuition are gained through perceiving.

The definition of perception is perhaps necessary when it comes to telling the tale of three of the largest, most visible and talked about IT companies in India.

To hold a finger on the pulse of harried analysts furiously working on the numbers spewed by the trio is no mean task and frayed reflexes would automatically harp on the disclosure standards of the not-so-forthcoming companies.

But considering profit growth, client additions, onsite-offshore mix, operating margins and visibility, analysts are sure about one thing: the hallowed trio are going to remain revered in the next four-five quarters at least.

On a roll

The reasons are obvious. For one, the results came in way above expectations. Infosys set the ball rolling by revising upwards its FY05 revenue and EPS guidance. The revised FY05 EPS estimates now stand at Rs 67 per share (Rs 62.7 per share), a y-o-y growth of around 44 per cent.

It also declared an interim dividend of Rs 5 and upgraded its FY05 revenue projections from 39-40 per cent to 47-48 per cent. The company added 32 new clients in the quarter, taking the active client base to 431. Its $10 million plus and $40 million plus clients have increased to 31 and 7 respectively in the quarter from 27 and 5 in the preceding quarter.

Next came TCS with its first quarterly results post-listing, which were well received by analysts. The company witnessed a topline growth of 13.9 per cent led by growth across verticals while bottomline growth came in a shade above 14 per cent.

TCS's profit figure came in much higher than analysts' expectations, which were closer to Rs 530-540 crore (Rs 5.3-5.4 billion). The company added 52 clients and around 4,000 employees in the quarter, which speaks volumes of the bullishness ahead.

Wipro announced its results in the fag end but its performance was no less inspiring. Its revenues from IT and ITES (IT enabled services) grew 11.8 per cent while consolidated PAT grew 15.4 per cent. Client additions at 31 and manpower additions at 5,550 (including BPO) were also impressive. Perhaps the most telling point was the beginning of an uptick in the pricing scenario.

Infosys managed a 4-5 per cent increase in pricing on new contracts in the last two-three months. Billing rates for onsite and offshore services improved by 1.6 per cent and 0.7 per cent respectively. TCS was tight-lipped about billing rates while Wipro's onsite billing rates were up 2.9 per cent. The latter's offshore rates slipped by 0.5 per cent.

God is in details

Among the three, Infosys has the highest operating margins (32 per cent) followed by TCS (27.47 per cent) and Wipro (26 per cent). Analysts say a major factor behind this is the large proportion of offshore revenues for Infosys (around 45 per cent).

Offshore services have higher margins relative to onsite services due to the fact that while billing rates may be higher for onsite services, the costs are also higher. Wipro also has a decent proportion of offshore revenues (around 43 per cent) while TCS's earns around 36 per cent of its revenues from offshore services.

Another telling point is the level of fixed-price contracts. Wipro brought it down to 22 per cent from nearly one third of the total contracts five-six quarters ago. In the case of Infosys, fixed-price contracts are around 31 per cent while they are nearly 60 per cent for TCS.

Head to head

When we put the trinity head to head for a comparison, a section of analysts concurs that Infosys and TCS are clearly way out in front while Wipro has miles to go before it hopes to catch up with the two.

In terms of size, TCS is a Rs 220-crore (Rs 2.2 billion) company while Infosys is around Rs 150 crore (Rs 1.5 billion); so analysts reckon that Infosys has some catching up to do. In terms of market capitalisation TCS  {Rs 53,000 crore (Rs 530 billion)} is the numero uno, trailed by Infosys {Rs 49,000 crore Rs 490 billion)} and Wipro {(Rs 43,000 crore Rs 430 billion)}.

Analysts say TCS also scores on profit growth, larger client base and attrition rate. However, analysts commend TCS's performance as far as EBITDA margins are concerned despite offshore revenues contributing only 37 per cent of total revenues. This should ensure a 5-6 per cent differential between TCS and Infosys.

On the other hand, Infosys has factors like sales growth and operating margins going its way. Wipro trails both Infosys and TCS on factors like operating margins and attrition rate.

Wipro's low operating margins can be attributed to large acquisition-related expenses that the company had to bear in FY04. And as far as attrition rate is concerned, Wipro trails on account of the large number of its employees working in the BPO division, which has high employee attrition rate.

Photo finish

To pick out a better player between Infosys and TCS was a difficult task with analysts parted right in the middle. As far as pure performance goes, there is not much difference between the three players.

However, Infosys comes up trumps on key aspects like project execution, delivery and management excellence while TCS has the scale and long-term relationships with key large clients as its forte.

While Infosys trades at around 25.6 times FY05 earnings, TCS trades at around 23.6 times. So why the premium? "Infosys deserves the premium, looking at the scalability of its model," says an analyst from a leading brokerage.

On the scalability factor, analysts give Infosys a 7 out of 10 while TCS gets 6. "Infosys looks set to overtake TCS in the next one-and-a-half to two years," says the head of research of a leading broking and research house.

Analysts say transparency, understanding of business and execution skills of Infosys give it the edge over TCS. The Tata firm comes a close second, having valuations in its favour while analysts say Wipro will continue at third place though it will not disappoint for the next two quarters at least.

Analysts give both TCS and Wipro raps on the knuckles as far as disclosure standards go. They give Wipro the thumbs down on its concentration on the low-margin BPO segment. They peg an FY05 EPS target of Rs 70 for Infosys, Rs 45 for TCS and Rs 23 for Wipro.

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