Forward valuations of Infosys have surpassed those of India’s largest IT company, TCS, for the first time in last five years as the the Vishal Sikka-led IT major posted strong Q3FY16 earnings in contrast to TCS, whose earnings have failed to meet the street expectations for the sixth quarter in a row.
One-year forward price to earnings (P/E) multiple of Infosys surged to 17.66 times on Thursday, whereas forward P/E of TCS stood at 17.14 times, Bloomberg consensus numbers showed. Besides, the surge in the shares of Infosys, close to 4% fall in the TCS stock since Tuesday, when it announced its October-December quarter results, have aided this flip. Since October 2010, TCS had widened its valuation premium over Infosys as it toppled the Narayana Murthy co-founded company as India’s biggest IT services company. In July 2014, the TCS premium had risen as high as 6.86 over the forward P/E multiple of Infosys.
Shares of Infosys rallied 4.28% on Thursday as the Street cheered better-than-expected earnings of Infosys. Traders were particularly enthused by the IT major’s decision to revise its revenue guidance for fiscal 2015-16.
A total of 1.68 crore shares exchanged hands across the exchanges against the three month average of 30 lakh shares, Bloomberg data showed.
For the quarter ending December, dollar revenue of Infosys grew by 0.6% q-o-q to $2.4 billion also as it said that for FY16 the top line may grow between 8.9% and 9.3% compared with an earlier guidance of 6.4% to 8.4%. Net profit of the company went up by 6.6% sequentially to Rs 3,465 crore. In dollar terms, Infosys posted a net profit of $524 million for Q3FY16.
The enhanced revenue guidance of Infosys is in contrast with TCS, which had reporters its quarterly earnings on Tuesday. TCS reported a sequential decline in dollar revenue even as analysts estimated flattish growth on account of higher furloughs and impact of Chennai floddings. In rupee terms, they were up 0.7% at Rs 27,364 crore. Since nearly a year now analysts are debating whether TCS can maintain its industry leading revenue growth trend.
Analysts were fast in cutting their earnings estimates for TCS. Nomura analysts revised down their EPS (earnigns per share) estimates for FY17 and FY18 by 3% and 4% respectively and said that given soft pricing trends and higher visa cost impacts, TCS margins are likely to be at the lower end of the range guided by the management(26%-28%) in FY17. The foreign brokerage prefers peers including Infosys and HCL Tech over TCS.
Infosys rally brought some cheer to shares of IT companies as the BSE Teck index closed 1.54% higher beating the benchmark sensex which closed 0.3% lower.Anaysts expect the situation to be tough in near and medium terms. Kotak Institutional Equities observed in a note to investors that IT companies could register slower growth rates due to pricing pressure and diminishing returns in core business services. “We would not be surprised with 2-3% lower growth rates for the industry. The good thing is that stock prices are already building in some slowdown. Companies that have track records of delivering in unstructured opportunities will lead the growth; we back Infosys on this count,” the report said.