Comparative Analysis of TCS, Infosys, Wipro and HCL -- For the Quarter ending June 30, 2014 (Q1, FY15)

With results of the top 4 of the Top 5 Indian IT firms for the quarter ending June 30, 2014  released to the world, we have adequate data points for a comprehensive comparative analysis and hence again a time for drawing inspiration from the winners and reflecting on the learnings one can pick up from the rest. The idea of this analysis is to present an ‘apples to apples’ comparison view to the readers unlike the view that comes from the media which is some time not an accurate representation of the reality on  the ground as they mix up numbers in INR with that of USD and that of GAAP with IFRS. My analysis is  based on the USD numbers as per IFRS norms based on the balance sheets released by the Top 4 Indian IT firms. Thanks to your constant encouragement, I have been sending out these communiques for over 10 quarters now without skipping even one quarter.

I had written in the communique that I sent last quarter that there seems to be a trend where in the Top IT firms are releasing their results within the first 2 weeks after the quarter ends. This excitement was however short lived as all the firms broke the trend this quarter and took more time to come out with their results. The gap between Infosys releasing its results and the other Top firms releasing its results further increased to an average of 2 weeks. Forbes came out with its list of Top 2000 Global firms a few weeks ago and four of the top 5 Indian IT firms (TCS, Cognizant, Infosys and Wipro) figure in this list. In terms of market capitalization TCS has far out performed the rest of the pack by touching  a value that exceeds the market capitalization of the next 3 firms put together. The market capitalization value of the Top firms is as follows: TCS[84 B USD], Infosys[31 B USD], Wipro[23 B USD] and HCL[18 B USD]. Though these numbers are small compared to IBM at 194 B USD, they do compare well with Accenture at 51 B USD. Now let’s dive deeper into the qualitative and quantitative analysis of the Top 4 IT firms.

Infosys growth rate might be showing signs of recovery in this quarter and we could perhaps expect a rebound with a new CEO at the helm. The new CEO clearly told the media that his priority was to bring growth back at Infosys by leveraging Innovation and Cutting Edge technologies for adding value to its clients. Infosys grew QoQ for in Q1, FY15 by 2% which is not bad on a standalone basis but does not look very pretty compared to its competition. The operating margins as a percentage of revenues which had hit a rock bottom of 21.8% last year has  rebounded to 25-26% in the last 3 quarters (including the current one) which is a clear sign of success of the firm’s cost optimization strategies. However the YoY growth for Q1, FY15 compared to Q1, FY14 was at 7.1% which means that the firm must accelerate over the next 3 quarters for ending FY15 with a decent growth in line with the 13-15% industry growth rate predicted by NASSCOM. The results for Q1,FY15 are however in line with FY15 growth guidance given by Infosys which is 7-9%. The overall employees today stand at 161,000 and overall utilization has increased to 75% (80% excluding trainees) at the end of Q1, FY15 up from 70% levels last year. Infosys has a client base of 910 active clients today with a net addition of 61 clients in this quarter alone. 

TCS has had a superb quarter which over shadowed all its accomplishments over the last 8 quarters. TCS had  a phenomenal growth of 5.5% QoQ during Q1, FY15 which beat all its growth rates in the last 8 quarters. TCS clocked  a whopping 3.7 B USD in revenues this quarter which clearly places it in a different league compared to the other Indian firms. TCS continues to stick to its core philosophy of ‘high growth with high profitability’ and has taken its profitability to ~30% levels in FY14. However its CEO went on record saying that they will be content with 25-26% operating margins and they want to plough back the rest as investments that fuel future growth and the same philosophy seems to have been already put into action with the current quarter operating margins at 26.3%.  The guidance for FY15 seems very positive and the firm is very confident of outperforming its act in FY14. I will not be surprised if TCS touches 20% revenue growth in FY15 going by its acceleration and its renewed focus on making investments to fuel growth. They seem to be taking a leaf out of Cognizant’s book of high growth fueled by investments and topping it up with the TCS core competency of yielding industry leading operating margins. The overall employee count has crossed the magic number of  300,000  last quarter and its overall utilization was 80% (85% excluding trainees) this quarter.

Wipro is becoming a mystery as there is no specific indicative pattern that one can see over the quarters and its performance is showing fluctuations from time to time. This quarter (Q1, FY15) was a bad one for Wipro with a mere 1.2% QoQ growth with the saving grace being that the YoY growth is 9.6%. While it appeared very good with its Operating margins at 24.5% in the last quarter, it does not look as rosy with a drop In Operating Margins this quarter to 22.8%. Wipro is one company that is making all the right strategic moves and seamlessly translating them to action as well. Keeping this in view the not so rosy performance  and a lack of a clear visibility on whether it is out of the woods or not is indeed a mystery. It has a total of 1022 customers today with a net addition of 31 customers in the current quarter. The year FY15 will be an interesting year for Wipro as it will be a make or break year for this veteran Indian IT firm. Wipro has 148,000 employees on its rolls and its utilization stands at 69%.

HCL  is probably the only company which has become very predictive in terms of its quarterly performance and is indeed a very steady and reliable firm in terms of its growth. It has been showing a steady growth of 3-4% over the last several quarters. HCL has grown by 3.4% QoQ in Q1, FY15 which is in tune with its historical trend. 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 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. HCL has been growing at a CAGR of 15% over the last 3 years and at the same time its Operating margins are growing at a CAGR of a whopping 40% over the last 3 years.  The firm has 90,000 employees with an utilization of 84%. HCL has crossed 5 B USD in terms of its annual run rate in the year ending March 30, 2014. This will give it further access to the larger deals which in turn will further fuel its growth.

RESULTS FOR QUARTER ENDING JUNE 30, 2014:

The summary of the Q1, FY15 comparative analysis for Infosys, TCS, Wipro and HCL is as follows:

1.       TCS leads in terms of QoQ Revenue growth at 5.5% with HCL following at 3.4%, Infosys at 2% and Wipro trailing at 1.2%

2.       TCS  leads in YoY Revenue growth at  16.7% with HCL following at 14.6%, Wipro at 9.6% and  Infosys trailing at 7.1%

3.       HCL leads in terms of QoQ Operating Profits growth at 1.7% with  Infosys following at 0.4%, TCS at -4.8% and Wipro trailing at -5.9%

4.       HCL leads in terms of YoY Operating Profits growth at 33.2% with Wipro  following at 24.9%, Infosys at 14.5% and TCS trailing at 13.6%

5.       TCS leads in terms of Operating Profits as a % of revenues at 26.3% with Infosys following at 25.1%, HCL at 24.2% and Wipro trailing at 22.8%

6.       TCS leads in terms of SG&A expenses as a % of revenues at 18.3% with Infosys at 11.9% and HCL at 11.8%

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

Q1, FY14
Parameter	Infosys	TCS	Wipro	HCL
Q1 Revenues(M USD)	2133	3694	1740.2	1406.9
QoQ Growth	2.0%	5.5%	1.2%	3.4%
YoY Growth	7.1%	16.7%	9.6%	14.6%
Q1 Operating Profits(M USD)	536	972	397	340.7
QoQ Growth	0.4%	-4.8%	-5.9%	1.7%
YoY Growth	14.5%	13.6%	24.9%	33.2%
As % of Revenues	25.1%	26.3%	22.8%	24.2%
Q1 Net Profits(M USD)	482	845	NA	305.4
QoQ Growth	-1.0%	-1.9%	NA	15.7%
YoY Growth	15.3%	20.5%	NA	44.3%
As % of Revenues	22.6%	22.9%	NA	21.7%
Q1 SG&A Expenses	253	677	NA	166
As % of Revenues	11.9%	18.3%	NA	11.8%

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

I will be back with more updates once Cognizant comes out with its quarterly results on August 6, 2014. 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