Tuesday, April 19, 2011

Is TCS really doing better than Infosys?

The financial media is ripe with the articles of praise for TCS and Infosys seems to have lost its glory over the last one year. See the headlines below:
Most of the analysts are not looking at the results of companies with sharp eyes. See the following table:
* 9 months FY11

If we forget about the quarterly movements of revenues then over the last 6 years, Infosys consolidated revenue increased from 7129.65 Crore in FY05 to 27501 Crore in FY11. During the same time TCS revenue increased from 9748.47 Crore in FY05 to estimated around 37000 Crore in FY11, not much difference between the two in terms of growth.

The annual report of Infosys clearly provides details about the expiry of tax exemption due to Software Technology Park(STP) scheme of government of India. There were five big centers (Bangalore, Pune, Mysore, Hyderabad, and Chandigarh) whose tax exemption expired in 2009 and there are three more (Chennai, Bhubaneshwar and Mangalore) whose exemption expired in 2010 and so the effective tax rate for Infosys has increased from 13.31% to 26.74% over the last two years. If the tax rate had remained the same, Infosys EPS this year would have been higher by INR 20. Due to new SEZ policy of government, the tax rate may again go down a bit due to lower MAT rates on SEZ and Infosys annual report does mention five centers whose tax exemption expires after 2020. On the other hand, TCS annual report does not give any information about this but STP is going to expire in March 2011 so TCS' tax ratio is likely to move higher in the next year which not a single analyst seems to be talking about right now.

Yes; the operating profit margin of TCS has caught up with that of Infosys over the last two years but I doubt they can do better than Infosys going forward. Let's see.
Being too far ahead of your time is indistinguishable from being wrong
 - Howard Marks

Image: xedos / FreeDigitalPhotos.net
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