JP Morgan: India IT Services: Infosys versus TCS part 2 - conclusions influencing the long-term picture; still some time away from being an even game

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The second annual edition of our definitive Infosys versus TCS report looks
at  how  Infosys  (Neutral)  and  TCS  (OW)  fare  on  performance-defining
parameters. These parameters have a longer-term bearing not  just  on  these
benchmark  companies  but  also  on  the  Indian  IT  sector in  general.
Specifically, in this edition, we analyze and contrast the two  on issues that have
acquired much  greater relevance today  (organization  structure, cloud computing,
expanding  the  addressable  market  and  broader  positioning  in  the  marketplace).
TCS leads on most dimensions but we believe that Infosys has identified gaps and
is working to plug them. That said, we think FY13 is likely  to be the earliest year
of catch-up for Infosys.
Our comparison analysis runs under four heads:
A. Looking at the future
 Broader  positioning: Infosys,  which  has  a  consulting-led  positioning,
must take care of the “bread-and-butter” opportunity market.
 Organization structure: Full verticalization of Infosys (including delivery)
versus the selective approach by TCS.
 Strategies  on  pursuing  non-linear  growth: TCS  articulates  non-linear
strategies and actions on cloud computing more expansively than Infosys.
 New  customer  segments: Infosys  reinforces  its  focus  on  big-bang
customers.  TCS  is  more  versatile  at  working  with  varying  customer
segments across markets.
 Patents  filed/pending  and  awarded: TCS  is  well  ahead  of  Infosys  on
patents  granted. Also,  has been  more  active  in  FY11  in  patent  filings.  It
needs to be monetized better both internally and externally.
B. Looking at financials more subtly
 TCS’ expansion into the SEZ is more aggressive; build-out has been earlier.
 Segmental  analysis  reveals that  Infosys  extends its lead in manufacturing;
TCS needs to do more here but has extended its lead/caught up elsewhere.
C. Looking at aspects of delivery and people
 Usage of sub-contracting to  access skill-sets/lower cost of delivery:  TCS is
well ahead here, but there is room to foster greater use of sub-contracting.
 Delivery  centers  &  sales  offices: TCS  leads  in  market  presence  though
Infosys is incrementally building out; TCS is localizing better.
D. Other  aspects:  Infosys is  building  profile  overseas  and  has  a  more  explicit
‘Infosys China’ ambition than TCS.
Conclusion: We conclude TCS is more  versatile at working  on  business models
that  embrace  diverse  customer  segments to  create  new  addressable  markets  with
longer-term  payoffs.  It  scores  on  dimensions  relevant to  delivery  such  as  market
presence,  sub-contracting.  It  has  a settled organization  structure  with  scalable,
relatively autonomous P&Ls and a robust HR engine that capitalizes on its cachet
in India with engineering campuses in India. TCS’ strong performance in “breadand-butter” offerings  attests  to  its  full-service  positioning  with  improved
productivity. On the other hand, Infosys scores better at defining & cultivating its
marquee client set (for deeper mining), protecting pricing through mix & nurturing
the brand overseas. We believe Infosys needs to focus on securing broader internal
buy-in to its revamped organizational structure, improve its client hunting abilities
and  enhance  positioning in  bread-and-butter  service lines  such as  ADM, testing,
BPO and infrastructure management.