TCS set to overtake Infosys

Company to become most profitable for the year experts say Infy may be less flexible in pricing deals

Tata Consultancy Services, India’s number one information technology services company, could overtake Infosys to become the most profitable one for the first time on a full-year basis in 2012-13.

The Mumbai-headquartered company is already ahead of Infosys on operating profit margin in the second and third quarters; in the first quarter, it was just 10 basis points (bps) less.

In the first three quarters of FY13, TCS’ average profit margin at 27.18 per cent is about 51 bps higher than that of Infosys. For the fourth quarter ending March 31, Infosys has already hinted the onshore pay rise it effected last quarter would impact the margins by about 100 bps. This could mean TCS will continue to maintain its leadership in profitability, making it the most profitable IT services company in India.

“I think TCS has a much better visibility on their business overall and it is able to plan for the long term in a steady manner, which obviously then keeps costs under control vis-a-vis Infosys. In the case of Infosys, for whatever internal reason, lack of stability in the growth is hurting their ability to not just manage costs but also to manage revenues,” said Partha Iyengar, vice-president at Gartner, the research and analyst firm.

In Q2 and Q3, TCS’ operating margins were 26.75 and 27.3 per cent, respectively, as compared to Infosys’ 26.34 per cent and 25.68 per cent. In the quarter ended December 31, TCS improved its operating margin by about 55 bps, whereas Infosys saw it declining by 66 bps.

According to some observers, the fact that Infosys has started to compromise on its profit margin could mean that the company is now investing back to the business more than before. It also indicates the company might have become more aggressive in contracting terms and pricing, to gain market share and volume. Traditionally, Infosys is known as a premium player in pricing.

“We don't see them (Infosys) giving pricing discounts, though they have become more flexible and responsive in contracting terms with clients. They have started to spend a little more on sales and marketing, which might have added to their costs,” said Sudin Apte, chief executive & research director of offshore advisory firm Offshore Insights.

In a meeting with analysts towards the end of last month, Infosys had indicated the company was becoming aggressive on pricing to drive volume growth. Analysts at an equity research company said Basab Pradhan, head of sales & marketing, alliance functions at Infosys, had confirmed the change in strategy.

In an interview to Business Standard in August last year, S Gopalakrishnan, executive co-chairman of Infosys, had also said pricing was becoming a major driver in acquiring newer clients.

“We are sensitive to the environment and we are sensitive that cost is a primary driver today. But we don’t want to position ourselves as the lowest-cost provider. We want to be competitive in the market in terms of total cost of ownership,” he had said.