Better Tech Stock: TCS vs Infosys

The IT and BPM sector has become one of the most significant growth catalysts for the Indian economy, contributing significantly to the country's GDP.

The IT industry accounted for 7.4% of India's GDP in FY22, and it is expected to contribute 10% to India's GDP by 2025.

The export of IT services has been the major contributor, accounting for more than 53% of total IT exports (including hardware).

The major players in this rapidly growing industry are Infosys and Tata Consultancy Services (TCS).

In this article, we compare the two companies on the basis of business operations, financial performance and future growth prospects.

Business Overview

TCS is a flagship company of the Tata group. It has been offering IT services, business solutions and consultancy services for over 50 years.

TCS is India's largest software services firm. It provides outsourcing, has a diverse client base and it geographically present across 6 continents.

The key business verticals for TCS are financial services, consumer business, life sciences and healthcare, manufacturing and technology and services.

Infosys is the 2nd largest information technology company in India behind TCS. It offers traditional as well as digital IT consulting services.

The company's digital services are rated to be among the best in the industry. Infosys derives 57% of its revenues from digital services and balance 43% from traditional services.

The key business verticals for Infosys are the same as TCS barring life sciences and healthcare. Infosys instead has an energy, utilities and resources division.

TCS vs Infosys Business Verticals

	TCS	Infosys
Key Business Verticals	Financial services	Financial services
	Consumer business	Retail
	Life Sciences & healthcare	Communication
	Manufacturing	Energy, utilities & resources
	Tehnology & services	Manufacturing
Competitive Advantage	Market leader in IT services	Digital services
	Outsourcing	Internet of Things (IoT)
	Diversified client base	Big data and analytics
		Artificial Intelligence (AI)

Data Source: Equitymaster

Revenue Growth (CAGR)

In the last five years (2019-2024), revenue of TCS and Infosys grew at a CAGR of 8.9% and 11.1% respectively.

Though Infosys has a higher CAGR, TCS is leading in terms of revenue, the revenue of TCS is 1.5 times that of Infosys.

TCS revenue growth was aided by manufacturing, life sciences and healthcare and energy resources division. On the other hand, Infosys revenue growth was aided by manufacturing, hi-tech and communications divisions.

TCS vs Infosys Revenue Growth (2020-2024)

	2019-2020	2020-2021	2021-2022	2022-2023	2023-2024
Revenue (In m)
TCS	1,569,490	1,641,770	1,917,540	2,254,580	2,408,930
Infosys	907,910	1,004,720	1,216,410	1,467,670	1,536,700
Revenue Growth %
TCS	7.0%	4.6%	16.8%	17.6%	6.8%
Infosys	9.8%	10.7%	21.1%	20.7%	4.7%

Data Source: Equitymaster

Higher Margins Backed by Lower Expenses

Both TCS and Infosys have healthy operating profit margins as they have kept their expenses low. The five-year average operating profit margin (OPM) for TCS and Infosys stand at 26.7% and 24.5% respectively.

As we can see, TCS is leading in this category.

TCS vs Infosys Profit Margins (2020-2024)

	2019-2020	2020-2021	2021-2022	2022-2023	2023-2024
Operating Profit Margin %
TCS	27.5%	27.0%	27.4%	25.6%	26.1%
Infosys	24.4%	26.7%	24.9%	22.9%	23.7%
Net Profit Margin %
TCS	20.7%	19.8%	20.1%	18.8%	19.1%
Infosys	18.3%	19.3%	18.2%	16.4%	17.1%

Data Source: Equitymaster

With respect to the bottomline, TCS and Infosys net profits have grown at a CAGR of 7.3% and 9.5% respectively in the last five years.

However, in terms of net profit margins, TCS seems to outperform Infosys with a five-year net profit margin of 19.7% and 17.9% respectively.

Employee Metrics

In the IT sector, employees are the most valuable assets as it is a service driven business.

Companies have to continuously invest in acquiring and keeping good talent to ensure company's growth. Therefore, IT companies have to roll out higher bonuses than the traditional businesses to retain talent.

In the services sector where human talent is the key to success for any company, employee attrition rate is the most important metric to track.

This year, IT companies witnessed a sharp decline in employee turnover across the industry. The attrition rate for TCS stood at 12.5% during the financial year 2024 compared to that of Infosys which stood at 12.6%.

TCS vs Infosys Attrition Rate (2019-2024)

	2019-2020	2020-2021	2021-2022	2022-2023	2023-2024
TCS	12.1%	7.2%	17.4%	20.1%	12.5%
Infosys	17.4%	10.9%	27.7%	20.9%	12.6%

Data Source: Equitymaster

A sharp decline in employee attrition rate for both these companies may give a positive impact on the margins as companies do not need to pay more to retain employees. Therefore, despite muted sales growth, there has been some margin improvement for both these companies in FY24.

Buybacks and Dividends

TCS and Infosys have bought back shares worth Rs 510 bn and Rs 185 bn respectively from the market in three different transactions in the last five years.

The reason stated for the buyback is to return excess cash to the shareholders.

A company generally carries out a buyback if it feels the share price is undervalued. When it buys back its shares, the earnings per share (EPS) rises. As a result, the price to earnings ratio (PE) falls, making it an attractive investment.

A company distributes its profits to its shareholders in the form of dividends. Dividends can be in the form of cash or stock.

TCS vs Infosys Dividend Payout Ratio (2020-2024)

	2019-2020	2020-2021	2021-2022	2022-2023	2023-2024
TCS	84.70%	43.40%	41.10%	99.90%	57.60%
Infosys	44.70%	59.30%	58.80%	58.40%	72.60%

Data Source: Equitymaster

The average dividend yield for TCS and Infosys is around 1.4% and 2.6% respectively.

Return on Equity

Return on equity measures how efficiently the company allocates its equity capital.

The average ROE for TCS and Infosys in the last five years stands at 43.7% and 29.5%, respectively. TCS has been more effective in terms of generating returns for its shareholders than Infosys.

TCS vs Infosys Return on Equity (2020-2024)

	2019-2020	2020-2021	2021-2022	2022-2023	2023-2024
TCS	37.6%	38.6%	44.1%	47.3%	51.0%
Infosys	25.6%	27.5%	29.4%	32.3%	32.5%

Data Source: Equitymaster

Valuations

The price to earnings (P/E) ratio is an appropriate valuation metric to determine whether the company's share price is overvalued or undervalued.

It indicates how much an investor is willing to pay for one rupee of earnings. A high P/E ratio indicates the shares are trading at a premium.

The P/E of TCS stood at 30.6, for the financial year 2024. For the last five years, the average stands at 30.3.

For Infosys, the P/E ratios stood at 23.7. The five-year average is 26.2.

TCS seems to be reasonably priced compared to its five-year average PE ratio whereas Infosys seems to be undervalued a little bit.

Future Growth Prospects

TCS CEO said that after a muted FY24, they expect FY25 to be better in terms of revenue and profitability.

However, no guidance was given with regards to revenue growth due to unpredictability in short term demand environment. There are certain pockets of growth in sectors such as insurance, airlines, transportation and manufacturing.

As for Infosys, for FY25 they have guided for 1-3% revenue growth in constant currency terms. This was against its revised growth guidance of 1.5-2 % for FY24.

The company expects growth to accelerate in financial services and telecom verticals due to large deal wins. Infosys also has a positive outlook on the European markets.

The IT firm suggested a margin guidance at 20-22% which is similar to the FY24 guidance.

TCS vs Infosys: Which Stock is better?

In terms of revenue and profit growth, Infosys has an edge over TCS. In terms of profit margins, TCS is leading. However, TCS is functioning on a larger revenue base, 1.5 times of Infosys. So, a lower number doesn't necessarily indicate a slow growing business.

TCS is doing a marginally better job in employee retention as demand for IT services in the post pandemic era is increasing.

TCS's record order book at the end of FY24 at US$ 42.7 bn indicates a good growth momentum in the medium term.

However, in terms of valuation TCS looks fairly priced as per its 5-year average PE whereas Infosys looks little undervalued.

Fundamentals and valuations play an important role in deciding which company is suitable for investment. So, take a close look at these parameters when choosing a stock to invest.

Still Confused Which is Better?

Use our feature-rich comparison tool, which draws a detailed comparison between any two companies. This tool also includes a graphical analysis making it easy for you to see trends!

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You can also compare both the companies with their peers.

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Check out the TCS factsheet and Infosys factsheet for a detailed analysis.

You can also check out the latest quarterly results for Infosys and TCS.

As stocks from the IT sector interest you, check out Equitymaster's powerful Indian stock screener tool to find the top IT companies in India.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...