Based on most financial parameters, Infosys is ahead of both Tata Consultancy Services and Wipro in the information technology space.
Infy's growth has been much superior in the past two financial years compared to TCS and Wipro Technologies (its global IT services and products business).
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Based on US GAAP data, Infy revenues have grown at a compounded annual growth rate of 39.6 per cent between the 2002 financial year and the 2004 financial year, marginally higher than Wipro's 39.3 per cent and TCS's 27.7 per cent growth.
It is crucial to note that much of Infy's growth is organic, except an insignificant amount of around $7 million, which was added to its topline in the 2004 financial year through the acquisition of Expert Information Systems, Australia.
On the other hand, Wipro's revenues have got a boost from the acquisitions of Spectramind, the global energy practice of AMS (American Management Systems) and Wipro Nervewire. TCS, of course, acquired CMC in the second half of the 2002 financial year.
What's more, Infy's operating profit has grown at a CAGR of 28 per cent between the financial year 2002 and the financial year 2004, compared to 20.2 per cent for TCS and just 10.5 per cent for Wipro.
And although the financial year 2003 was a bad one, Infy's operating profit grew 22.5 per cent in that year, compared to a -0.9 per cent decline for TCS and a mere 4.4 per cent growth in the case of Wipro.
Needless to say, Infy's performance has been more steady, while TCS' and to some extent Wipro's earnings have been lumpy.
On profitability parameters, again, Infy is ahead with an operating margin of 27.6 per cent in the financial year 2004, compared to 25.4 per cent for TCS and 20.7 per cent for Wipro.
Wipro's margins in the financial year 2004 were hit partly because of assured bonuses to employees of some acquired companies. Steady state margins are estimated in the region of 25-26 per cent, which is still lower than Infy's.
Interestingly, TCS' gross margin is the highest among the three at 45.9 per cent, but TCS records the salary cost of software consultants who are not engaged in providing services (bench) at the operating level and not at the gross level, like its competitors do.
For a fair comparison, one must look at the operating margin. Without getting into much detail, Infy also has a stronger balance sheet especially in terms of a strong cash reserve and also scores in terms of disclosures and transparency.
Yet it is interesting that Wipro still gets a higher discounting compared to Infy. One of the reasons for this is that Wipro has a much lower floating stock.
But another reason which has kept the Wipro stock afloat at high levels is that it has a very strong technological ability, it has been successful in adding new service lines and has a much wider service range.
For instance, it has been successful in the infrastructure outsourcing space and has made strong headway in the Business Process Outsourcing space. The feeling is that this capability may result in higher growth going forward.
Infosys has been less successful with its new service lines. TCS also enjoys good technological skill-sets like Wipro, and has the added advantage of being more flexible on pricing and deal structuring. TCS, of course, has struck the largest deals in the IT space among Indian players, which gives it a big potential for growth.
But thanks to the way the initial public offer has been structured, TCS has no cash in its books and a net worth of around Rs 1,100 crore (Rs 11 billion), which could go against it while bidding for large orders.
However, it is not that TCS and Wipro have got these wider capabilities overnight. Wipro's valuation premium to Infy has always been there and is largely justified by its wider service offering. But as the financials show, the wider service range hasn't really resulted in these companies outperforming Infy in the past.
