With the results of COGNIZANT
hot off the press, let’s take a quick re-look at the comparative financial
performance of the Top 5 Indian IT firms for the quarter ending 30’th
September, 2013. The changes made to the earlier version of my analysis
published last month covering the Top 4 Indian IT players other than Cognizant
are highlighted in YELLOW.
Cognizant has been
consistently beating its own quarterly guidance since the last 3 quarters and
has been achieving the highest growth rate quarter on quarter across all the 5
Indian IT firms. The guidance given by Cognizant in the last 3 quarters hovered
around 3-5% but its actual growth was 6.7% in the latest quarter (Q2), 7% in
the previous quarter (Q1) and 3.7% in the quarter before that (Q4, FY13).
In the three consecutive quarters till date its growth was the highest amongst
all the 5 Top Indian IT firms. The focus of the firm on Operating Margins also
seems to be increasing which is seen by the Operating Margins as a % of
revenues at 19%-20% in the last 2 quarters compared to the 17-18% range in the
earlier quarters. The firm which had downgraded its annual growth guidance in
April, 2013 to 17% YoY has once again increased its annual guidance to earlier
levels of 20.5% growth YoY. At the same time its SG&A is still on an
upward curve and is the highest amongst the Top 5 players.
Infosys growth rate has stabilized over the last 4 quarters and
has returned to what I believe as the long term industry standard rate of ~3.5%
QoQ. This is a welcome change and indicates that the strategies that Infosys
has put in place are bearing fruit. However at the same time Infosys Operating
margins are the lowest amongst the Top 4 firms. And as its CFO indicated the
margins are likely to remain at this number in the ensuing quarters as well.
This when looked in tandem with the increase in SG&A by 2 percentage points
indicates that Infosys is at an Inflexion point where it has taken a decision
to move away from its most talked about strategy of industry leading margins so
as to boost investments in 'Sales' which will eventually propel growth.
TCS has been doing just the opposite. Its record breaking
operating margins exceeding 30% when looked in tandem with the QoQ growth rate
of 5.4% indicates that it has mastered the art of delivering high profits
together with high growth rates. The financial numbers for this quarter are the
best so far in the recent times for TCS. At the same time TCS has cut down its
SG&A by 2 percentage points over last quarter. It remains to be seen if the
lowering of investments in 'Sales' is a one off event or if will become a trend
in future. It also raises questions on whether its whopping operating margins this
quarter have been delivered by sacrificing its investment in 'Sales'. We
need to ponder on whether the reduction in this investment is because TCS
feels it has made enough investments in Sales over the last few years and
whether keeping the investments at current levels will sustain the velocity of
TCS in the days to come.
HCL and Wipro have also reported a marginal increase
in their Operating margins over the last few quarters. The overall trend in the
IT Services industry this quarter points to increasing operating margins
(Infosys being an exception). However Wipro is still battling its
post-recession woes and will take time to recover from the same. HCL has
stabilized its QoQ growth rate at ~3.5% over the quarters and I believe this
will become the new normal for the IT services industry akin to the erstwhile
Hindu rate of growth for Indian economy.
The
biggest puzzle in the entire equation is Infosys. Has Infosys embarked
on a Cognizant like 'growth' strategy by funneling its profits into sales and
platforms? Will this strategy remain its long term direction or will this just
be an intermediate strategy to get growth back on track? Here is my take
on the Infosys strategy. Every company has its own very unique DNA and can
produce the same results as competition by adopting different approaches.
To an outsider looking at Infosys it might appear as if Infosys has adopted a
Cognizant like low margin strategy as an interim strategy and once growth comes
back, it will switch to the TCS model of high growth and high profitability
co-existing together!!
This
might be true but what is more important is how Infosys pulls this off.
With the focus back on the large outsourcing deals it will be difficult to
sustain the high profits which Infosys once enjoyed as the market is
commoditized. While Infosys get back growth by leveraging this approach it will
see a short term erosion in its margins. In the background is the Infosys 3.0
strategy which will enable eventually Infosys to move up the value chain and
this reclaim its premium positioning in the market place. The market is not yet
ready for the Infosys 3.0 offerings and is still nascent. This might mean Infosys
might need to invest on educating the customers and prod them to try their
hands on transformational services in the initial few quarters. Once the
strategic and futuristic engine of Infosys ( the consulting and transformation
engine ) starts in full throttle then Infosys can continue on its high growth
rate and also get to regain its premium pricing advantage. This together with
the cost optimization strategy which Infosys is pursuing with full rigour will
enable it to boost the margins and replicate TCS like financial performance in
the years to come. A recent article in HBR which talks about the “Big 5”
consulting firms at the cusp of disruption clearly indicates a possibility of
IT firms like Infosys or Cognizant or TCS capturing a good chunk of the consulting
business that was once limited to a hallowed few firms. This validates that
Infosys 3.0 though ahead of the times is the right thing for Infosys to do to
be successful.
RESULTS
FOR QUARTER ENDING SEPTEMBER 30, 2013:
The summary of the Q2, FY14 comparative
analysis for Infosys, TCS, Cognizant, Wipro and HCL is as follows:
1.
Cognizant leads in terms of QoQ Revenue growth at 6.7%
with TCS following at 5.4%, Infosys at 3.8%, HCL at 3.5% and Wipro trailing at
2.7%
2.
Cognizant leads in YoY Revenue growth at 21.9% with TCS
following at 17%, Infosys at 15%, HCL at 14.1% and Wipro trailing at 5.9%
3.
HCL leads in terms of QoQ Operating Profits growth at
18.2%, with TCS following at 17.6%, Wipro at 15.5%, Cognizant at 2.5% and
Infosys trailing at -3.6%
4.
HCL leads in terms of YoY Operating Profits growth at
42.5% with TCS following at 32%, Cognizant at 23.1%, Wipro at 15.1%
and Infosys trailing at -4.4%
5.
TCS leads in terms of Operating Profits as a % of
revenues at 30.2% with HCL following at 23.8%, Wipro at 22.5%, Infosys at
21.8% and Cognizant trailing at 19%
6.
Cognizant leads in terms of SG&A expenses as a
% of revenues at 19.2%, with TCS following at 17.8%,Infosys at 13.5% and HCL at
12.7%
Following is a chart showing the
comparative analysis of these top firms on various financial parameters:
Q2, FY14
|
|||||
Parameter
|
Infosys
|
TCS
|
Wipro
|
HCL
|
CTS
|
Q2 Revenues(M USD)
|
2066
|
3337
|
1631.1
|
1270.3
|
2305.72
|
QoQ
Growth
|
3.8%
|
5.4%
|
2.7%
|
3.5%
|
6.7%
|
YoY
Growth
|
15.0%
|
17.0%
|
5.9%
|
14.1%
|
21.9%
|
Q2 Operating Profits(M USD)
|
451
|
1007
|
367
|
302.3
|
437.35
|
QoQ
Growth
|
-3.6%
|
17.6%
|
15.5%
|
18.2%
|
2.5%
|
YoY
Growth
|
-4.4%
|
32.0%
|
15.1%
|
42.5%
|
23.1%
|
As
% of Revenues
|
21.8%
|
30.2%
|
22.5%
|
23.8%
|
19.0%
|
Q2 Net Profits(M USD)
|
383
|
748
|
NA
|
225.6
|
319.63
|
QoQ
Growth
|
-8.4%
|
12.0%
|
NA
|
6.6%
|
6.4%
|
YoY
Growth
|
-11.1%
|
16.3%
|
NA
|
42.8%
|
15.4%
|
As
% of Revenues
|
18.5%
|
22.4%
|
NA
|
17.8%
|
13.9%
|
Q2 SG&A Expenses
|
278
|
595
|
NA
|
161
|
443.3
|
As
% of Revenues
|
13.5%
|
17.8%
|
NA
|
12.7%
|
19.2%
|
*Wipro does not give
P&L for Global IT services separately. There is a single P&L for Wipro
Limited
I hope you enjoyed reading this
article and it will be great to hear from you on what you think. Please do feel
free to post your feedback on my views…
Note: The views expressed in the article above are purely the personal views of the author and have nothing to do with the firm he works for
