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How TCS displaced Infosys as the bellwether of India's IT sector

TCS’ market cap is now almost 2.5 times more than its nearest Indian competitor, Infosys. So, no. Infy isn’t as valuable as TCS.

April 26, 2018 / 05:44 PM IST
 
 
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TCS, India’s largest IT services company, is having a pretty good time of turning 50. As it enters its sixth decade, TCS is now one of the world’s 100 most valuable firms by market valuation. The market capitalisation of Tata Consultancy Services crossed $100 billion or Rs 665,275 crore on Monday, making it the first Indian company in a decade to reach this milestone. Unlike most of us, TCS’ management obviously didn’t hate their Monday morning this week. Tuesday was a bit of a bummer as TCS dropped back down to 98 billion but who’s counting, right? The rupee, which saw a sharp depreciation on that day, gained a bit the next day.

The last time an Indian company made it to the 100 billion club was in 2008. Mukesh Ambani’s Reliance Industries hit that valuation 10 years ago.
Wait, Infosys isn’t a bigger name than TCS? In what is probably a pretty sweet feeling, TCS’ market cap is now almost 2.5 times more than its nearest Indian competitor, Infosys. So, no. Infy isn’t as valuable as TCS. Its market cap as on April 19 was $37.32 billion. In March 2009, TCS was 1.5 times smaller than Infosys in terms of market value. TCS’ valuation is now more than the market value of Infosys, Wipro, HCL & Tech Mahindra, combined.

So here’s how it went down. TCS is the biggest cash cow for the Tata group. Last week, on April 20, TCS shares moved up almost 7%, sending the company’s market cap over USD 98 billion. The spike was a response to better-than-expected earnings for the fourth quarter announced on April 19. TCS’ Q4 net profit rose 5.7 percent to Rs 6,904 crore, and revenue increased 3.8% to Rs 32,075 crore. TCS also announced a 1:1 bonus share issue, lifting investor sentiment. TCS shares gained over 25% since January, compared to an approx. 14% rise in share value for Infosys. Even better, TCS’ stock has given a 65% return from the lows of 2016. So if you are one of those who put your money into TCS back in 2016, congrats. You’re richer by a fair bit now.

What does all this mean in simple numbers? There are only 63 other companies with a market cap of more than $100 billion. Facebook, Amazon, Apple, IBM, Microsoft, Google's Alphabet and Alibaba are among the companies in the hundred billion dollar club – the Who’s Who of global business giants.

Let’s try a few analogies here to understand the 100 billon dollar valuation. TCS's market cap now is more than the GDP of over 120 countries. That sounds like a cring-y, old world way of doing it – like when they used to say the top 10 American companies had more money than all of India. Or NASA has as many Indian engineers as ISRO. So let’s see - countries like Ecuador, Slovakia, Kenya, Costa Rica, Belarus, Bulgaria, Sri Lanka, Luxembourg - all of them have GDPs under one hundred billion dollars, and TCS's market cap alone is more than the GDP of all of these countries. By the way, the NASA stat is totally made up. Here’s another interesting perspective, if jingoism is to your taste. The market valuation of all the firms listed on the Pakistan Stock Exchange is 80 billion dollars, and TCS alone has well over that in market cap.

No, that stat is not made up.

Former managing director of TCS, and current Tata Sons chairman, N. Chandrasekaran told the media double digit volume growth is a distinct possibility in the future, and this could well lead to greater appetite for TCS shares among investors.

While some believe TCS outperformed Infosys because of greater focus on new technologies, analysts say there’s more at play here. “It would be wrong to say TCS has done something vis-a-vis technology that Infosys has not,” said one analyst with Greyhound Research. “TCS has a much bigger scale at which it is implementing these things.”

So what sets TCS apart that propelled it to such heights? Most software exporters from India struggled amid changing client requirements and protectionist policies in the US. The thing that sets TCS apart is leadership. High quality, insightful leadership and smooth transitions of CEOs over the years are some of the reasons it has left Infosys behind in recent years. That might sound like I’m snarking Infosys, but remember Vishal Sikka? Sums up the leadership quandary at Infosys, I suppose. Let’s just say they haven’t been exemplary over at the Infy HQ in the Electronic City. As Fortune India put it this week, “TCS’ nearest rival Infosys, which has been besieged by its own internal leadership challenges, gave a conservative guidance for operating margins going forward.”

TCS has been outdoing Infosys in certain areas for a while now. Various reports have said that TCS' average forward PE multiple stands at 19.3x versus 16x for Infosys, implying an average PE premium of over 20% for TCS over the last five years or so. It’s quite something that such a large organization, employing over 370,000 people in a maturing industry, has maintained and enhanced profitability over a long duration. It delivered revenue growth well above the industry average. Media reports also gave credit specifically to TCS’ strong processes, execution engine and operational efficiency, saying these would drive TCS’ performance going forward. They described these factors are structural, something that gives India‘s largest IT services company a very real competitive advantage over its equally impressive peers.

How about we take a look at the leadership issue? Because we know the widely reported issues at Infosys affected the IT major adversely. Washing dirty linen in public doesn’t make for good business, apparently.
Infosys hired new CEOs in recent years as did Tata Consultancy Services. However, Infy’s CEO story is a well-known soap opera. Or maybe it’s a comedy that deserves its own Netflix show.

S Gopalakrishnan served as chief executive from 2007 to 2011. After him, SD Shibulal, then COO was promoted to CEO. This was a tough time at Infosys. It was growing slower than Wipro and Cognizant was the big boy in the market, followed by HCL. TCS was third fastest in terms of growth, posting 15.1% growth in CY2012. Shibulal’s “Infosys 3.0” strategy had failed to turn things around. “One of the big weaknesses of Shibulal is that he is a great executor but probably could not communicate,” a managing partner of consulting firm Browne & Mohan had told Business Standard. Shibulal retired from Infosys on account of non-performance, and Infosys founder & former CEO NR Narayana Murthy returned for a year to stabilise the company’s business while the board scouted the globe for a suitable CEO.
Then came the high-profile hiring of Vishal Sikka. The soap opera was about to turn into a sitcom. The former CTO of SAP was hired by Infosys for a salary of $13 million and tasked with turning around the fortunes of the company that was always second place and simply wasn’t growing further. He instituted changes that made the company grow again for two years. He brought 16 senior people over from SAP to help him in his endeavour. But by year three, Sikka had fallen out with the co-founders of Infosys.

It is said he had an issue with the IT industry in general. He is quoted as saying, “I was not deeply familiar with the services industry until recently. I find all of us in the industry on a downward spiral…It’s like a treadmill of increasingly lower cost, hiring people faster and faster, from more and more mediocre places, training people less and less, putting them into (a) job faster and faster. I think that is a wrong direction.”

This was in conflict with the accepted wisdom of the IT industry in general in India: mass hiring, cost-effective solutions and economising. Heck, he even made sure that employees could wear regular casual clothes at work on weekdays. Some reports say that brought about some friction with the wise men who had founded the company.

Sikka quit Infosys in 2017, plunging the company into a minor crisis. Hi resignation cost Infosys a fortune— Rs 22,500 crore in market value was wiped in one day as shares tanked by 13 percent in intra-day trading. Exit Sikka, enter Nandan Nilekani, the man who had been handling Aadhaar. Eventually, current CEO Salil Parikh took over and is now dismantling the Sikka era at Infosys, stepping away from the software-and-people approach employed by Vishal Sikka to focus on digital services.

In contrast, N Chandrasekaran served as CEO of TCS for seven years, providing stability and focused leadership. Chandrasekaran, or Chandra, is an old TCS hand. He joined TCS as an MCA intern at age 24, straight out of REC Trichy.

In 2007, he was made COO of TCs and was instrumental in Tata’s high profile acquisition of Citigroup Financial Services for $500 million. Just two years later, he was appointed CEO & Managing Director of TCS at age 46 after the exit of then CEO Ramadorai. Not a bad journey at TCS for the 24 year old intern from 1987. The inside joke, a joke every bit as terrible as the ones I make, goes that TCS stood for “Take Chandra Seriously.” The former CEO, S Ramadorai, had taken charge in 1996. What I’m getting at is the steady tenure of leadership at TCS and the ability of its top people to recognize and groom future leaders. Ramadorai had served as CEO for 13years, mentoring Chandra from the start. “I spotted him (Chandrasekaran) way back in 1996, and knew that hat he had the potential,” Ramadorai said at the time of his exit. Chandrasekaran served as CEO for 7 years.

This isn’t to glorify Chandrasekaran but to throw light on the leadership style at what is now the largest Indian IT services company.
Chandra did indicate that his strategy, and indeed of TCS, was that of strapping in for the long haul. For instance, Chandrasekaran, the current Chairman of Tata Sons, is a marathoner. “Running has made me more observant, calmer, and taught me to persevere,” he told the newspaper the Financial Times. “One thing I’ve learnt from running marathons is that everything is long-haul. Nothing happens overnight.”

Compare the steady, focused approach at TCS, with emphasis on smooth transition, to the seeming knee jerk replacements at Infosys and we get an inkling of what the experts are talking about.

An interesting aside: For those of you that follow the lifestyles of CEOs, N Chandrasekaran runs up to 16 kms most days, starting at 5am.
Both companies have seen leadership changes. The difference in results indicate that TCS benefited from not suffering the disruptions that Infosys has over the last few years, according to researchers. TCS has maintained focus in its strategy and identified niches with clients, relentlessly pursuing results.

And this has an impact on the organization’s overall value in the market. Leadership turmoil is a significant factor for investors. While they look at hard metrics like revenue and profits, they also pay close attention to the so called soft metrics – like leadership - while placing their bets. “TCS is out and out a professionally run company…Infosys is still having teething trouble as it comes out of the arms of its founders. Infosys has a great example in TCS to learn how to build a strong second-rung leadership that can hold the fort if things go wrong at the top-level,” according to Sanchit Gogia, chief analyst and CEO of Greyhound Research.

Ouch! That’s going to sting the guys leading Infosys. But it does seem to be the perception, if not the popular opinion.

“Infosys has underperformed big time because of the ugly spat between the founder member i.e, Murthy, and Sikka… Big and small investors, local and global, moved out from Infosys to TCS and that flight continues,” an expert from BNP Paribas observes. Infosys will regain confidence but it will take time, he added.

On the other hand, TCS, true to its nature, is playing the long haul. “I have always believed that the opportunity in the tech space, and for TCS, is very large and the digital transformation is going to be a very big opportunity…I believe it is the start of the next run,” N Chandrasekaran told a new channel.

The IT Services industry, which generates close to 167 billion dollar annually, is at a crossroads. The rise of automation, artificial intelligence, and cloud computing... all trends are taking companies in a new direction - away from the labour-intensive back office programming operations. That said, analysts believe Tata may be in the best position to make the leap from the old to the new.

Current CEO& MD, Rajesh Gopinathan, said he is excited with the business 4.0 journey and the great opportunity to be a digital partner of choice for customers in their growth and transformation journey. What is this business 4.0? In short, new age-technologies like automation, cloud and Internet of Things (IoT) that could lead to revenues of over $5 billion this year. The CEO said there are many components to digital technologies, - cloud, automation, analytics, IoT. “People have been looking at various technologies, each of which is powerful and valuable in its own right but the point has been, how to stitch it together to help businesses," he said.
TCS expects that this digital opportunity will be in the billions globally as new technologies become increasingly entrenched across the board among enterprises. Last fiscal, TCS earned over $3 billion in digital revenue. That’s a growth of 35 per cent, much faster than the previous year.

It’s not all happy endings over at TCS. The company has more immediate concerns that it needs to pay attention to. We spoke about the transition from the old to the new. Rising hiring costs are a huge problem, especially for a company that has almost four lakh employees representing 131 nationalities across 46 different countries. Immigration curbs, courtesy one Mr Donald Trump, may well hamper the company’s ability to move cheaper, skilled Indian employees into its largest market, the United States. Even after hiring the required workforce, getting them up-to-speed with all the rapid changes will cost money, and lot of it. TCS has shown it is agile enough to handle the current unpredictability and fluidity in the industry. All things considered, TCS has positioned itself smartly, and should see good revenue growth. Its low cost execution supports distinctive margins. "Good growth plus distinctive margins over many years produces a huge market cap," according to Rod Bourgeois of US-based Deepdive Equity Research.

Another market veteran, Phil Fersht, CEO of IT research firm HfS, is more effusive in his praise for TCS, "TCS has stayed very focused on relentless execution and is less obsessed with marketing messages and trying to sound like everyone else. It has created its own…identity, which many of the other service providers are still struggling to do. I sometimes call TCS the 'Indian IBM' because of the longevity of its staff and its unique culture". High praise from Mr Fersht there.

Over at Infosys, current CEO Salil Parikh said the company has worked out a three-year transformation plan that would start showing faster growth by FY21. The strategy will require the company to invest in sales to win the kind of large deals announced by rival TCS. Announced regularly, I might add. Infosys’ three-year plan has analysts worried that the company will lag its peers in growth. Infosys’ FY19 revenue forecast of 6-8% is below the 7-9% target issued by industry body Nasscom. Parekh said his company reported $2.79-billion digital revenues at the end of last fiscal and will attempt to become more relevant to the clients’ futures to tap the estimated $160-billion global market opportunity.

Even as the CEO stakes his claim, the worry that Infosys is missing out on mega-deals has resulted in a plan to refresh its sales engine. The company won about $3 billion in large deals in FY18, less than half the $6 billion plus won by TCS.

Market pundits are of the opinion that TCS has been able to execute its strategy the best. TCS' revenue grew by 8.6 percent to $19.1 billion in fiscal 2018 while Infosys' revenue rose 7.2% to $10.9 billion.
While TCS’s results beat analysts' estimates across all parameters, Infosys fell short on margin guidance. But CEO Gopinathan plays down the hype. “Our approach is the same. We are boring if you look at it,” he told the Economic Times. He summed up his company’s strategy as a ‘bet on its people.’ TCS has been a conservative company that never focused on market valuation. The last word today belongs to the man who picked N Chandrasekaran to turn TCS into the behemoth it is today, ex-CEO S Ramadorai: “I don’t think we were chasing numbers. What we said was, are we delivering on our promises? Are we raising the bar every time? Are we absorbing new technologies and innovating, and bringing out our differentiators day in and day out?”

first published: Apr 26, 2018 05:44 pm

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