Founded in 1968, Tata Consultancy Services pioneered the off-shoring model which is the very premise of Indian IT sector's global competitiveness.
The company's advantage of being in the business for more than three decades is demonstrated in its size.
While this is a definite advantage, analysts feel that Infosys and Wipro are equally well placed given the huge market potential and their competencies in the software services business.
In fiscal 2003 TCS became the first Indian IT services organisation to generate $1 billion in annual revenues. And the company is substantially bigger than the two other billion-dollar IT firms.
TCS is 42 per cent larger than Infosys and 57 per cent bigger than Wipro in terms of revenues (considering global IT services business). Its profit was higher by half compared with Wipro's and about 22 per cent higher compared with Infosys' based on TCS's nine-month annualised figures.
In terms of profitability, TCS scores over Wipro but is several notches behind Infosys. Infosys' operating profit for fiscal 2004 was 33 per cent while the same for TCS was 25.5 per cent and that for the global IT services division of Wipro (including Spectramind) was 24.7 per cent.
The interesting point is that gross margin for TCS' consultancy services division, which contributes 93 per cent to total revenues, was 48 per cent which is on par with that of Infosys.
This has been possible despite a lower contribution from off-shore business and a large proportion of fixed-price contracts.
While offshore revenues were only 36 per cent of total revenues for TCS, it constituted around 45 per cent of Infosys' turnover in fiscal 2004. Higher component of off-shore business could improve margins going forward.
Also, fixed-price contracts are normally considered risky as any cost and time over-runs will have to be absorbed by the service provider, which could eat into margins.
However, a company like Patni - which also has a large proportion of fixed-price contracts - feels that fixed-price contracts are actually better because additional cost savings by the company is not passed on to the client and get added to the company's bottomline.
Besides, fixed-price contracts also provide better earnings visibility. Fixed-price contracts thus may not necessarily be an evil, as long as the company has a fair amount of experience in executing large projects. TCS has more experience than its peers in executing large-sized contracts, which renders it this edge.
One key issue, however, is that GE is still a significant client for TCS. GE is known to be a tough client. Companies like Infosys and Wipro have stopped dealing with GE as a client due to low billing rates.
Another reason for TCS' lower profitability seems to be the high level of operating expenses (read selling general and administrative expenses). SG&A expenses were pretty high for TCS at 20 per cent of revenues, compared with just about 14 per cent for Infosys and Wipro.
Over the next few quarters, Infosys and Wipro are likely to increase their SG&A expenses which are expected to adversely impact their margins. TCS may not be under so much pressure as its selling spends are already high.
