TCS and Infosys have both now reported their Q4 and full FY 2014 results. A quick look at their respective revenue numbers (not to mention margins, utilization and attrition rates) highlights very significant difference in performance across geographies, service lines and industries, with TCS surging ahead across the board, in many of them at a level that is simply breath-taking. 

TCS

Q4 FY 2014 revenues increased by $464m y/y, a growth of 15.3%. The significant y/y growth was seen across all three major regions, with:

• North America revenues up $212m
• Continental Europe up $138m - in full FY 2014, TCS achieved a stunning 51.7% growth in Continental Europe
• U.K. up $113m.

U.K./Europe (excluding MEA) accounts for 28.7% of global revenues, or $3,858m in FY 2014. Add in MEA and the EMEA figure is $4,140m… to put this into context, that is about the same as Sopra and Steria added together (combined revenues of €3,105m in 2013).

By service line, what do we see at TCS?

Every single service line delivered double digit y/y growth this quarter, with the software business (asset leveraged solutions) having its best quarter since FY 2012 (estimated 20% y/y growth in US$). Global consulting, assurance (testing) services and engineering services all turned in growth of over 20%.

The big revenue engines are ADM, which generated $148m in incremental revenue (we have written about this before, see “TCS Q3 FY14 Results: TCS Continues to Pull Ahead - What are Its Growth Engines? here: ), followed by another applications services unit, Enterprise Solutions, achieving $79m in incremental revenues. BPO and assurance services achieved a very respectable $59m/$57m in additional revenue.  TCS is reaping the benefits in service lines which it started investing in a few years back: in FY 2014IT infrastructure services and BPO units both topped $1.6bn in revenue, and its testing services unit is now a $1.1bn business.

By vertical, growth was again wide-spread, with double digit growth in every vertical group with the single exception of the currently challenged high-tech sector  - and even this turned in over 7% y/y growth. In telecoms, another challenged industry, TCS has now delivered three consecutive quarters of double digit growth. There were no surprises that BFSI, which accounts for around 43% of TCS business, continues to be the major revenue engine, contributing $181m, or 39% of the overall y/y growth this quarter.

Infosys:

First the good news: FY14 revenue growth of 11.5% was double that of FY13 (5.8%). But Q4 FY14 y/y rev growth slowed to 7.9%, with $154m in incremental revenue. So in this quarter alone, TCS achieved $310m more in incremental revenue than Infosys - that is nearly a third of a billion dollars.

By geography, the only region showing significant growth in Q4 was North America, where revenues were up $84m (40% of the $212m achieved by TCS). Europe revenues (Continental Europe and U.K.) were up <$43m in US$– compare this with the >$250m achieved by TCS. Full FY14 European revenues crossed the $2bn mark (a milestone, but half the size of TCS' business).

By service line, Infosys delivered, like TCS, around 20% growth in testing services, and engineering services (an estimated 15% y/y growth) had its strongest quarter since Q4 FY12. ADM is also showing slow steady improvement in y/y growth (we estimate over 9% this quarter). But where TCS achieved $148m in incremental revenues in AD/AM this quarter, Infosys achieved just $44m. For FY 2014, the figures are $641m for TCS, $173m for Infosys (so a difference of nearly half a billion dollars in just this core area).  The pattern is similar in other services lines, for example:

• IT infra services: TCS generated $269m additional revenues in FY14, Infosys $75m
• BPO: TCS generated $167m additional revenues in FY14, Infosys $59m.

And where TCS’ software business (essentially its BaNCS product line) is back to slow growth, Infosys’ Finacle software business isn’t. The worst performing part of the business is what should be the incubation unit – the newer offerings in the PPS family, they are still delivering no growth.

Turning our attention to verticals, there is just one industry group where Infosys achieved topline growth that was higher than TCS in FY14: manufacturing. Infosys’ manufacturing vertical group (which includes high-tech) delivered 16.5% growth in FY14, reaching $1,785m. TCS manufacturing and high-tech vertical groups combined delivered an estimated 12.8% growth, reaching ~$1,868m.

But in BFSI, the difference in both scale and growth is stark. TCS’ BFSI vertical group delivered an estimated 15.7% growth in FY14 to reach an estimated $5,767m. Infosys’ BFS and Insurance groups combined achieved an estimated 8% growth in FY14 to reach ~$2,420m. That’s over a $3bn difference.

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Infosys has been lagging TCS for years; this is not new. Some of the reasons are current and company-specific issues. But we should also look back nearly a decade and consider some of the investments that TCS has been making over the years. To give just a few examples, TCS was one of the first IOSPs to extend its delivery outside of India, it was at the forefront of inviting advisers and analysts into its offshore GDCs, of recruiting locals for country heads, regional business development heads for service lines, domain expertise and marketing, and it has at times been very bold in moving into new markets (the U.K. public sector to give just one example). And in recent years, TCS has kept its eye firmly on the ball in its traditional ADM business while successfully nurturing other service lines, some of which (IT IM, BPO, testing) are now giants in their own right.

At Infosys, a key characteristic has always been caution. There have been few examples where it has been bold in applying the “speculate to accumulate” maxim. The company has been slow to acquire client or third party operations, and under-invested in sales and marketing (indeed in the last year it has been firing onshore execs in senior non-billable roles) and there have not been ambitious strategic partnerships. Infosys was late to put client partners in place to increase wallet share in its key accounts, and it is only now talking about hiring 200 people from ”prestigious U.S. universities” to expand/revitalize its U.S. sales engine. Does this imply that Infosys is avoiding lateral hires? (AKA poaching), preferring instead to inculcate new recruits in the “Infosys way”? Meanwhile, the exodus of senior execs since last summer, combined with the fact that the company has publicly announced it is starting the search for its next CEO (something that is very unusual in Indian IOSPs) must be unsettling.

Its core ADM businesses underperformed between June 2012 and June 2013 when the company did not seem to be in tune with the market price sensitivity, though this has been improving over the last nine months. Looking ahead, Infosys is possibly going to separate out its PPS business. There is clear logic to this (e.g. software and services have different financial profiles), but clients today have higher expectations now of their service providers. And this move would weaken its ability to go to clients with integrated offerings that span operational or technology consulting plus technology plus outsourcing (as, for example, Accenture is doing with its various “business services”; a positioning that other service providers are also adopting).

If we look to FY15, TCS management is talking about a healthy pipeline and expressing confidence that it can achieve even stronger topline growth than the 15.3% delivered in Q4 FY14. Infosys says its pipeline is “marginally better” after a disappointing Q4, and is guiding on growth of 7% to 9% in FY15. The talk is of a multi-year journey. But the company was talking about a journey that would be a “marathon not a sprint” two years back...