a tale of two stocks

Have a look at the below graph:

Over the last five years, Infosys stock price has increased 67%, TCS 302% compared to Nifty's 48%. While it was better to put money in Infosys instead of the broader Nifty, it isn't the whole truth. 

What are the causes - management, corporate performance or market frenzy? If we analyze the performance of the business of these two firms, we will get some story to tell. 

In 2009, TCS revenue was Rs.27,813 crores and for Infosys it was Rs.21,693 crores. Earnings were Rs.5,256 crores and Rs.5,988 crores. Not poles apart. Market gave higher value to Infosys at about Rs.75,000 crores compared to Rs.53,000 crores to TCS due to the former's superior operating margins. The writing was on the wall in favor of Infosys.

Now in 2013, that writing appears to have been replaced by another script. TCS revenue was Rs.62,989 crores and Infosys, Rs.40,352 crores. Earnings were Rs.13,917 crores and Rs.9,429 crores. 

This performance has given TCS a market value of about Rs.314,000 crores compared to Rs.161,000 crores to Infosys. Is this justified?

TCS revenue and earnings grew at a rate of 22% and 27% compared to about 16% and 12% for Infosys. Margins also have been better for TCS. A superior performance. 

However, Infosys has at least one number in its favor: On a per-share basis it has beaten TCS. EPS of Infosys grew from Rs.104.53 to Rs.164.20, a growth rate of close to 12% compared to Rs.54.20 to Rs.71.82 for TCS, a growth rate of just over 7%. 

Return on equity, which is an important indicator of how capital has been employed by management, is definitely in favor of TCS: An improvement from about 43% to 47% now for TCS and deterioration from about 43% to 30% now for Infosys.

The perception of the market has changed clearly though - PE for TCS was about 10 in 2009 compared to more than 22 now (based on annual historical numbers).  For Infosys, it was just over 12 in 2009 compared to about 17 now. 

The story hasn't been that good for Infosys. Well, TCS is the most valuable company in India now; almost double the size of Infosys.

Heck, what's happening at Infosys? Too many things - one is bringing back Mr.Murthy.  His efforts surely would be to narrow the gap we see in the below table as much as possible.

Here's the final piece:

Of course these recommendations are only for the next 12 months. I leave it to you to guess the right one for TCS and Infosys as I am not that interested in the brokers' abilities.

I cannot buy into any of these stocks, for there is too much to predict over the next 5-10 years: Management behavior, Information technology environment, Developed markets growth rates, Emerging markets growth rates, foreign exchange rates, and so on.

Technology is good, but I can only applaud the leaders from a good distance. 

Let's look back some years later to check on them.