Comparative Analysis of Top 5 Indian IT firms -- Year and Quarter ending updates for March 31, 2014

With the Cognizant results released yesterday we now have the results of all the Top 5 Indian IT service firms for the year and quarter ending March  31, 2014  released to the world and thus have adequate data points for a complete look at the comparative performance of these firms. For the benefit of those of you who have read my earlier version of the communique that was sent after the 4 firms other than Cognizant released their results, I am marking the changes in YELLOW.

Like always this is an apple to apple comparison of the Top 5 companies based in IFRS accounting standards and also considering the time period from April 1, 2013 to March 31, 2014. This is important as different firms have different financial years and this is the only way we can standardize the comparison for the last 12 months.

One interesting trend is that unlike the previous quarters where the gap between Infosys announcing the results and the remaining companies following suit took a few days to a week or even more, this time all the Top 4 companies announced their results within a 48 hour period. Looks like corporate governance and financial adeptness is again back in vogue as the latest fad. Cognizant announced its results on pretty much on the same day as they did last year.

Before we delve into the detailed analysis of the comparative performance of these top firms, let’s have a quick look at the 3 key trends that I am seeing in the demeanor of these Top 5 firms.

Firstly ‘the move towards greater profits’ is a clear and certain change that is happening uniformly across all the 4 firms. Gone are the days when only Infosys and TCS would be hovering around 25-29% and the rest would move around 15-20% operating profits levels. If you look at the Q4, FY14 results we see 3 out of the 4 top firms with Operating profits as a % of revenues at around 25% and with TCS clearly leading at 30%. Cognizant seems to be the only outlier to this trend with Operating profits at 19%. Secondly all the Top 5 firms now are in the ‘5 B USD plus club’ with HCL being the latest entrant this year and TCS is the lone player in the ‘10 B USD plus club’ and well on its way to join the ‘15 B USD plus club’ in FY15. Cognizant will be joining the ‘10 B USD plus club’ in FY15. Lastly the ‘share of North American market’ as an overall % of revenues has been reducing across all the firms and the share of Emerging markets and Europe has been increasing.

Cognizant growth rate seemed to have slowed down from its hey days during the last year where it touched 7% QoQ levels to a more somber 2.8% levels for the quarter ending March 31, 2014. Cognizant grew YoY in FY14 compared to FY13 by a whopping rate of 21% and has outsmarted its nearest competitor TCS by nearly 4 percentage points. The operating margins as a % of revenues are decent at around 19% in the recent quarters and have remained stable at around 18-19% in the last 8 quarters. The growth guidance for the next year is 16.5% and it appears as if TCS will accelerate further in FY15 exceeding the growth rates of Cognizant.  When the slowing growth rate and lower margins are looked in tandem it does not appear as if the “ploughing back the profits into Sales related investments” strategy of Cognizant is yielding the same results as in the last few years. Keeping this in view TCS looks much more healthier at 29% operating margins and their CEO says that they want to maintain Operating profits at 26-28% and plough the remaining into platforms and solutions as investments for future. On a comparative basis the gaps on all parameters between TCS and its competition will further widen next year.

Infosys growth rate was showing signs of recovery in the past 6 quarters and signs of rebound were visible. It has now again somewhat taken a beating and the firm finished Q4, FY14 with a QoQ drop of -0.4% in revenues. However the yearly growth trend looks healthy with a 11.5% growth YoY and this shows an upward trend and nearly doubled from 5.8% levels an year ago. The operating margins as a percentage of revenues which had hit a rock bottom of 21.8% three quarters back has  rebounded to 25-26% in the last 2 quarters which is a clear sign of success of the firm’s cost optimization strategies. The overall employee count is 160,000 and overall utilization was increased to 74.4% at the end of Q4, FY14 up from 70% levels 4 quarters back. Infosys has a client base of 898 active clients today with a net addition of 92 clients in FY14.  The firm has given a rather muted guidance of 7-9% growth for FY15 but the analysts expect that it will outdo its FY14 performance in FY15.

TCS has had yet another phenomenal year and closed the financial year FY14 with a  revenues of a whopping 13.4 B USD which is more than double of what the firm did in FY10. It is a text book example of ‘high growth with high profitability’ characteristic and has further upped its ante by taking its profitability to ~30% levels in this financial year. While the QoQ revenue increase in Q4, FY14 was disappointing at 1.9% it is over shadowed by rather sober 17% YoY growth levels in FY14 vis a vis FY13. The overall employee count has crossed the magic number of  300,000  this quarter and its overall utilization was 78% this quarter. The guidance for FY15 seems very positive and the firm is very confident of outperforming its act in FY14. So we could expect 18-20% revenue growth for TCS in FY15.

Wipro has done quite well this quarter with a QoQ growth of 2.5% and when this is seen in the wake of its consistent 2.5-3% growth in the last 4 quarters, points to the fact that it has come out of the woods. What is even more interesting is that it has managed to improve its Operating margins by a tune of 4 percentage points in the last 4 quarters and ended Q4, FY14 at 24.5%. It has managed to shrink its revenues from the North American market to sub 50% levels in FY14 thus reducing its geo based market risks. It has a total of 986 customers today with a net addition of only 8 customers in FY14. The year FY15 will be an interesting year for Wipro as it will be an year when it will possibly bounce back to double digit growth after a hiatus of 3 years.

HCL  is the only company that has been showing a steady growth of 3-4% over the last several quarters. And as I mentioned in one of my earlier communiques this will eventually become the norm for the Indian IT services industry very akin to the much talked about “Hindu rate of growth”. HCL has shown a CAGR of 14% over the last 3 years on the revenue front and is accelerating with all cylinders firing on the profitability front with a CAGR of a whopping 40% over the last 3 years. HCL has shown a steep increase in its operating profits as a % of its revenue from ~15% levels 8 quarters ago to ~25% levels today which is a very significant accomplishment. This silent achievement speaks volumes about the companies strategies in three areas : viz. cost optimization in terms of eliminating wastes, improvement in employee productivity and non-linear revenues especially in the Infrastructure space.

A.      RESULTS FOR FINANCIAL YEAR ENDING MARCH 31, 2014:

The summary of the FY14 comparative analysis for Infosys, TCS, Cognizant, Wipro and HCL is as follows:

1.       Cognizant  leads in YoY Revenue growth at 20.8% with TCS following at 16.2%, HCL at 14.1%, Infosys at 11.5% and Wipro trailing at 6.4%

2.       HCL leads in terms of YoY Operating Profits growth at 38.1% with Cognizant following at 25.7%, TCS  at 25%,  Wipro at 16.2% and Infosys trailing at 3.7%

3.       TCS leads in terms of Operating Profits as a % of revenues at 29.1% with Infosys following at 24%, HCL at 23.3%,  Wipro at 22.6%  and Cognizant trailing at 19.2%

4.       Cognizant leads in terms of SG&A expenses as a % of revenues at 18.7% with TCS following at 18.3%, HCL at 18.5% and Infosys trailing at 11.9%

Following is a chart showing the comparative analysis of these top firms on various financial parameters:

FY14
Parameter	Infosys	TCS	Wipro	HCL	CTS
FY14 Revenues(M USD)	8249	13442	6617	5180	9244
YoY Growth	11.5%	16.2%	6.4%	14.1%	20.8%
FY14 Operating Profits(M USD)	1979	3906	1496	1207	1772
YoY Growth	3.7%	25.0%	16.2%	38.1%	25.7%
As % of Revenues	24.0%	29.1%	22.6%	23.3%	19.2%
FY14 Net Profits(M USD)	1751	3139	NA	943	1293
YoY Growth	1.5%	22.9%	NA	39.9%	18.4%
As % of Revenues	21.2%	23.4%	NA	18.2%	14.0%
FY14 SG&A Expenses	978	2457	NA	650	1727
As % of Revenues	11.9%	18.3%	NA	12.5%	18.7%

*Wipro does not give P&L for Global IT services separately. There is a single P&L for Wipro Limited

B.      RESULTS FOR QUARTER ENDING MARCH 31, 2014:

The summary of the Q4, FY14 comparative analysis for Infosys, TCS, Cognizant, Wipro and HCL is as follows:

1.       HCL leads in terms of QoQ Revenue growth at 3.0% with Cognizant following at 2.8%, Wipro at 2.5%, TCS at 1.9% and Infosys trailing at -0.4%

2.       Cognizant  leads in YoY Revenue growth at  19.9% with TCS following at 18.8%, HCL at 14.3%, Wipro at 8.5% and  Infosys trailing at 7.9%

3.       Wipro leads in terms of QoQ Operating Profits growth at 9.2% with  HCL following at 6.9%, Cognizant at 2.7%, Infosys at 1.5% and TCS trailing at -0.2%

4.       HCL leads in terms of YoY Operating Profits growth at 44.3% with Wipro  following at 31.6%, TCS at 27%, Cognizant at 25.7% and Infosys trailing at 16.8%

5.       TCS leads in terms of Operating Profits as a % of revenues at 29.1% with Infosys following at 25.5%, HCL  at 24.6%,Wipro at 24.5% and Cognizant trailing at 19%

6.       Cognizant leads in terms of SG&A expenses as a % of revenues at 20% with TCS following at 18.1%, HCL at 12.2% and Infosys at 11.5%

Following is a chart showing the comparative analysis of these top firms on various financial parameters:

Q4, FY14
Parameter	Infosys	TCS	Wipro	HCL	CTS
Q4 Revenues(M USD)	2092	3503	1720.2	1361	2422.34
QoQ Growth	-0.4%	1.9%	2.5%	3.0%	2.8%
YoY Growth	7.9%	18.8%	8.5%	14.3%	19.9%
Q4 Operating Profits(M USD)	534	1021	421	335	460.04
QoQ Growth	1.5%	-0.2%	9.2%	6.9%	2.7%
YoY Growth	16.8%	27.0%	31.6%	44.3%	25.7%
As % of Revenues	25.5%	29.1%	24.5%	24.6%	19.0%
Q4 Net Profits(M USD)	487	861	NA	264	348.9
QoQ Growth	5.2%	0.3%	NA	9.3%	7.6%
YoY Growth	9.7%	32.1%	NA	39.8%	22.8%
As % of Revenues	23.3%	24.6%	NA	19.4%	14.4%
Q4 SG&A Expenses	240	635	NA	166	485.4
As % of Revenues	11.5%	18.1%	NA	12.2%	20.0%

*Wipro does not give P&L for Global IT services separately. There is a single P&L for Wipro Limited

Please do feel free to post in 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