Infosys vs TCS: Which IT Stock is Better?

The Indian IT industry is one of the leading destinations in the world for the services sourcing business. According to the India Brand Equity Foundation (IBEF) report, it accounts for approximately 55% of the global IT services industry market share.

In India, the industry accounted for 8% of the GDP in 2020.

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

Infosys is one of the leading Indian IT services companies offering traditional and digital IT and consulting services.

The company's digital services-related capabilities in cloud computing, the internet of things (IoT), big data and analytics, and artificial intelligence (AI) are ranked the best in the industry.

The key business verticals for Infosys are financial services, retail, communication, energy and utilities, and manufacturing.

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

The company holds a leading position among Indian players in the IT services space. It provides outsourcing, has a diversified client base and offers a wide range of services.

The key business verticals for TCS are the same as Infosys, barring manufacturing. The company instead has a life science and healthcare division.

Infosys vs TCS Business Verticals

	Infosys	TCS
Key Business Verticals	Financial services	Financial services
	Retail	Retail
	Communication	Communication
	Energy and utilities	Manufacturing
	Manufacturing	Life science and healthcare
Competitive advantage	Digital services	Market leader in IT services space
	Internet of things (IoT)	Outsourcing
	Big data and analytics	Diversified client base
	Artificial Intelligence (AI)

Source: Company data

Both the IT giants are competing for market share in similar segments. They are also actively securing new deals in each of the key verticals.

Revenue growth (CAGR)

In the last five years (2017-2021), revenue for Infosys and TCS grew at a CAGR of 12.2% and 10.2%, respectively.

Though Infosys has a higher CAGR, TCS is leading in terms of revenue, the revenue of TCS is 1.6 times that of Infosys.

The revenue growth for Infosys was driven by the technology, energy, and utility industries. On the other hand, the revenue growth for TCS was led by the life science and healthcare division.

Infosys vs TCS Revenue Growth (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue (in m)
Infosys	705,220	826,750	907,910	1,004,720	1,216,410
TCS	1,231,040	1,464,630	1,569,490	1,641,770	1,917,540
Revenue Growth (%)
Infosys	2.90%	17.20%	9.80%	10.70%	21.10%
TCS	4.40%	18.90%	7.20%	4.60%	16.80%

Source: Annual report

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 27.1% and 25.6% respectively.

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

Infosys vs TCS Profit Margins (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Operating Profit Margin (%)
Infosys	26.8%	24.4%	23.9%	27.4%	25.9%
TCS	26.4%	26.9%	26.8%	27.6%	27.1%
Net Profit Margin (%)
Infosys	22.7%	18.6%	18.3%	19.3%	19.4%
TCS	21.0%	21.5%	20.6%	20.4%	20.7%

Source: Annual report

With respect to the bottomline, Infosys and TCS net profits have grown at a CAGR of 7.2% and 6.5% respectively in the last five years.

However, in terms of net profit margins, TCS and Infosys seem neck to neck with a five year net profit margin of 19.4% and 20.7% respectively.

Employee metrics

In the IT sector, employees are invaluable assets.

Companies have to continuously invest in their employees to ensure their growth along with the company's growth. A dissatisfied employee's productivity is usually low which can lead to attrition.

When assessing the human capital of a company, there are two employee metrics to look at - revenue per employee and attrition.

In the financial year 2022, the revenue per employee for Infosys and TCS stood at US$ 51,900 and US$ 43,100, respectively.

Both companies reported a degrowth in their revenue per employee number by 5.1% and 5.9% respectively.

Infosys vs TCS Revenue per Employee (in US$ '000)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Infosys	54.6	54	54.1	55.2	51.9
TCS	48.3	49.3	49.1	45.4	43.1

Source: Annual report

Even though the number of employees at TCS are almost double the number of employees at Infosys, the company's attrition levels are the lowest in the industry.

This year, IT companies witnessed a sharp rise in employee turnover across the industry. The attrition rate for TCS stood at 17.4% during the financial year 2022 compared to that of Infosys which stood at 27.7%.

These levels shot up compared to the past year due to increased demand for IT and supply tightness in niche skill areas. This has led to a surge in employee costs for the company, affecting profitability. Therefore, despite a strong growth in the revenues the margins for most IT companies, including Infosys and TCS remain muted.

Infosys vs TCS Attrition Rate (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Infosys	16.4%	18.3%	18.2%	15.2%	27.7%
TCS	11%	11.3%	12.1%	7.2%	17.4%

Source: Annual report

Shareholder payout through buybacks and dividends

Infosys and TCS have bought back shares worth Rs 304.6 bn and Rs 480 bn from the market in three different transactions in the last five years.

The reason stated for the buybacks 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 buyback is also a preferred route if the company sees good growth in the near future and wants to retain profits instead of distributing to its shareholders.

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

The five-year average dividend yield for Infosys and TCS is around 2.7% and 1.9% respectively.

Even though the dividend yields are low, the average dividend pay-out in the last five years for Infosys and TCS is pretty decent at 57.9% and 48.9%, respectively.

Infosys vs TCS Dividend Payout Ratio (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Infosys	63.3%	62.6%	45.3%	59.7%	58.7%
TCS	38.6%	36.6%	85.9%	42.6%	48.9%

Source: Equitymaster

Return on Equity

Return on equity (ROE) measures how efficiently the company is using its equity capital.

The average ROE for Infosys and TCS in the last five years stands at 25.6% and 36.4%, respectively. TCS has been more effective in terms of generating returns for its shareholders than Infosys.

Infosys vs TCS Return on Equity (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Infosys	24.7%	23.7%	25.2%	25.2%	29.6%
TCS	29.6%	34.4%	37.5%	37.7%	43.1%

Source: Annual reports

Valuations

The Price to Earnings ratio (P/E) 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 Infosys stood at 29.9 , for the financial year 2022. For the last five years, the average stands at 19.8.

For TCS, the P/E ratios stood at 35.6. The five-year average is 23.8.

Both the shares seem slightly overpriced when compared to their five-year averages.

Infosys vs TCS Valuation Ratios (2021-2022)

	P/E Ratio	5 year average P/E
Infosys	28	21.1
TCS	29.4	26.2

Source: Annual report

Key Acquisitions

Both Infosys and TCS have acquired quite a few companies to strengthen their client services across all verticals.

In the financial year 2021, Infosys acquired GuideVision, Kaleidoscope Animations, Inc, Beringer Commerce Inc., and Beringer Capital Digital Group Inc.

The company has spent close to Rs 14.7 bn on these acquisitions.

Meanwhile, TCS acquired Pramerica in 2020. BridgePoint, and W12 Studios were acquired in the last five years.

Future prospects

Infosys expects strong demand from its clients in the digital, cloud, and data segment. This expectation is backed by the huge deal successes they had in the past few years..

In 2018, the company adopted a four-pronged strategy to drive value creation. Scaling their digital presence, strengthening their core, and reskilling their workforce and localisation has led to an increase in their digital revenues and increased the deals they are securing since 2018.

For TCS, the top management feels that the pandemic has been the catalyst to appreciation and urgent adaptation of cloud platforms.

This is an enormous opportunity for TCS as it has invested in research and innovation, upskilling its employees, intellectual property, and partnerships. These investments might finally pay off and help them gain a considerable market share in this opportunity.

Equitymaster's View

We reached out to Tanushree Banerjee, Co-head of Research at Equitymaster to ask her view on both companies. Here's what she had to say...

• While Infosys and TCS would be more or less at par when it comes to their financial performance in the immediate future, the real game changers will be the companies' investments in new technology innovations and startups.
  
  These investments could give the fortunes of one of these companies a massive edge over the other, in the next few decades.

Which is better?

In terms of revenue and profit growth, Infosys has a better edge than TCS. However, 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.

With the increasing demand for IT services in the post-pandemic era, retaining manpower has become a crucial. TCS is doing a better job at retaining its employees. It continues to enjoy the lowest attrition levels in the industry

TCS is also leading in the deals it has secured in the past year. A strong deal pipeline of TCS indicates good growth in the medium term.

However, in terms of valuations, TCS looks overpriced than Infosys. But the gap in their valuations isn't very wide.

Fundamentals and valuations play an important role in deciding which company is suitable for investment. So take a close look at these parameters before you choose the stock to invest.

While the stock price of Infosys is up 2.5%, TCS and has been falling in the past month. It is now trading at Rs.2,998, touching its 52-week low of Rs. 2,953.

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!

Infosys vs TCS

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.

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...