The loss of senior business heads in the strongest market and an inferior positioning in key growth market Continental Europe increase the hurdles before management in its quest for revenue growth revival. While a weaker Indian rupee can help Infosys to price its services competitively, the continuation of senior management exits can blunt the effectiveness of these measures.
Given its scale and geographical diversification, Tata Consultancy Services (TCS) benefits from 1) economic recovery in the US, 2) a rebound in demand from the financial services vertical (42% of rev vs. 34% for Infosys), 3) continued strength in demand for outsourcing from Europe (biggest beneficiary), and 4) a pick-up in discretionary spending.
We reiterate TCS, Rs 1,837, Buy, TP Rs 2,150) as our top pick, along with Tech Mahindra Ltd.
Our target price is based on a target P/E of 16x FY14E/09, which we believe is fair given an earnings CAGR of 13% over FY14-16E and a PEG of 1.1.