Analysts prefer Infosys over TCS after Q2 show

Following the muted guidance by Tata Consultancy Services (TCS) and a relatively good show by Infosys for the Q2 – second quarter, analysts now seem to prefer the latter over the former.

Ten per cent discount to Tata Consultancy Services (TCS):

As per an analyst, though overall Infosys has delivered a good September quarter (Q2), the downward revision in FY17 guidance implies a weaker H2 than earlier expected.

He added that he awaits more details on the drivers behind the feeble outlook. Infosys numbers are better than TCS and even though outlook is muted, the firm is likely to outgrow Tcs in FY17 CC – constant currency revenue terms. Infosys is trading at close to 10 per cent discount to TCS on consensus FY18 P/E multiple. He expects the discount to narrow and prefers Infosys over TCS.

Productivity sector:

Coming back strong following an underwhelming performance in the last quarter, Infosys clocked higher than expected revenue in the 2nd quarter of the current financial year. Nonetheless, higher than expected downgrade in CC revenue growth guidance to 8-9 per cent from 10.5-12.5 per cent is the chief disappointment.

Infosys’ growth margin convergence and visible prospects of an improvement versus TCS has helped in a narrowed valuation gap. It is believed Vishal Sikka, Infosys CEO has been successful so far to incorporate the right and relevant changes to the organization, which now only need to be tested for its objective of improved employee productivity. A marked deceleration in growth momentum will likely keep the TCS stock to remain at modest P/E multiples.

TCS’ exposure to both BFSI (banking, financial services & insurance) and UK is marginally higher than peers, signifying that performance in the near term may not see any sharp revival.

It is believed that several factors including lack of easy share gains, portfolio challenges, high exposure to traditional services and lack of participation in early-stage digital opportunities hint that TCS will struggle to replicate the success of the past.

The second quarter (Q2) results of Tata Consultancy Services (TCS) and Infosys, which came out on Thursday and Friday, should be witnessed as the beginning of the end of the Indian IT services business model, where labor arbitrage and linear growth in hiring and revenue went hand-in-hand. In the coming future, we shall witness more discontinuous growth, more acquisitions in the value-added platforms, consulting and products space, and a sharp downturn in manpower growth.

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