Post Q2 show, analysts prefer Infosys over TCS

Following the muted guidance by TCS and a relatively good show by Infosys for the second quarter, analysts now seem to be preferring the latter over the former.

According to Prabhudas Lilladher, though overall Infosys has delivered a good Q2, the downward revision in FY17 guidance implies a weaker H2 than earlier anticipated.

“We await more details on the drivers behind the weak outlook. Infosys results are better than TCS and even though outlook is muted, company is likely to outgrow TCS in FY17 constant currency (CC) revenue terms. Infosys is trading at nearly 10 per cent discount to TCS on consensus FY18 P/E multiple. We expect the discount to narrow and prefer Infosys over TCS,” it added.

Bouncing back strongly following an underwhelming performance in the previous quarter, Infosys posted higher-than-expected revenue in the second quarter of the current fiscal, said Reliance Securities. However, higher-than-expected downgrade in CC revenue growth guidance to 8-9 per cent from 10.5-12.5 per cent (versus our expected 9-10 per cent revised guidance) is the key disappointment, said Reliance Securities, which set a target of ₹1,140 for Infosys with a ‘buy’ rating.

Rahul Jain of Systematix believes Infosys’ growth margin convergence and visible prospects of an improvement versus TCS has helped in a narrowed valuation gap. “We believe Infosys CEO Vishal Sikka has been successful so far to introduce the right and relevant changes to the organisation, which now only need to be tested for its objective of improved employee productivity,” he said.

According to Centrum Broking, a marked deceleration in growth momentum is likely to keep the TCS stock to remain at modest P/E multiples.

Motilal Oswal, which maintained its neutral rating on TCS said, TCS’ exposure to both BFSI (banking, financial services & insurance) and UK is slightly higher than peers, implying that performance in the near term may not see any sharp revival. “Our target price of ₹2,500 discounts FY18 EPS by 17x, and implies 7 per cent upside,” Motilal said.

“We believe multiple factors such as lack of easy share gains, portfolio challenges, high exposure to traditional services and lack of participation in early-stage digital opportunities mean that TCS will struggle to replicate the success of the past,” Kotak Securities said while re-emphasising its ‘reduce’ rating on TCS.

Reliance Securities changed its recommendation on TCS to ‘reduce’ from ‘hold’, owing to inferior growth metrics, challenging macroeconomic environment and issues in the key BFSI vertical.

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