The Hindu Business Line : TCS scores over Infosys on return on net worth

THE striking aspect of the financials of Tata Consultancy Services (TCS) is the lower asset base of the company compared to that of Infosys Technologies.

At the end of December 2003, the net worth of TCS was about Rs 1,200 crore, while that of Infosys at the end of March 2004 was Rs 3,200 crore.

In addition, TCS had invested only about Rs 300 crore in fixed assets between fiscal 2001 and the nine-month period ended December 2003. In contrast, Infosys Technologies had sunk more than Rs 900 crore between March 2001 and March 2004. In terms of revenues, TCS continues to be larger than Infosys and its return on net worth sparkles compared to that of Infosys.

The pace of growth recorded by Infosys Technologies, however, has been much higher. Between fiscal 2001 and fiscal 2003, revenues of Infosys rose at an annual rate of about 38 per cent, while that of TCS recorded growth of about 26 per cent. Infosys' profit after tax registered a growth of about 24 per cent, while TCS clocked a growth of about 16 per cent.

Growth rates apart, a few similarities between TCS and Infosys could be discerned. The domain of BFSI (banking, financial services and insurance), manufacturing and telecom accounts for major proportion of revenues for both the companies. Exposure to major clients was strikingly similar too with top 10 clients accounting for a virtually identical 38 per cent.

There are, however, striking differences which perhaps suggest that TCS is following a business model that is slightly more nuanced:

The proportion of fixed price contracts was about 35 per cent for Infosys at the end of December 2003. For TCS, the proportion was substantially higher at 56.3 per cent. Fixed price contracts generally require better project management skills to remain profitable.

The proportion of onsite revenues for TCS was about 64 per cent at the end of December 2003. This was lower at 53 per cent for Infosys.

The proportion of application development, maintenance and engineering services accounted for a much higher proportion of revenues for TCS compared to Infosys.

There are also differences in the management of employees. For TCS, growth in employee costs has lagged that of growth in total income. In contrast, for Infosys growth in staff costs has been strikingly faster than that of total income growth. Also, while Infosys already has an employee stock option plan (ESOP) in place, TCS is planning to come out with an employee stock purchase plan (ESPS). An ESPS will have less accounting complications compared to an ESOP. These differences, however, have not meant much in terms of exploiting growth opportunities even as Infosys is threatening to catch up with TCS, in terms of size of revenues.

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