Closing in: Infosys rally narrows valuation gap with TCS

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Updated: September 17, 2019 7:05:24 AM

nvestors seem to have not only bought into the Infosys growth story but also the fact that the company intends to distribute a larger portion of free cash-flows to shareholders.

Infosys, Infosys stock, TCS, valuation gap, Jefferies, 'buy' ratingAfter several quarters of under-performance, Infosys surged 26.1% between January and September while TCS gained 13.5%. (Reuters)

The recent rally in the Infosys stock has narrowed the valuation gap with TCS to an over two-year low. Infosys currently trades at one-year forward price to earnings multiple of 20.50 while TCS commands a PE ratio of 22.69. In September 2018, TCS commanded a valuation premium of 42% but that is now down to 10.7%. After several quarters of under-performance, Infosys surged 26.1% between January and September while TCS gained 13.5%.

Post Q1FY20, Infosys raised its growth guidance for FY20. It increased FY20 revenue growth guidance to 8.5%-10% in constant currency terms from 7-5%-9.5% on back of strong deal wins and record total contract value. Investors seem to have not only bought into the Infosys growth story but also the fact that the company intends to distribute a larger portion of free cash-flows to shareholders.

Jefferies, which has a ‘buy’ rating, is of the view that Infosys is best placed in the near-term on both growth & margin. “We maintain near-term visibility is best for Infosys amongst top tier companies given its strong deal win momentum. We expect revenue growth for FY20E to surprise positively at 11.5% y-o-y constant currency vs. its latest guidance of 8.5-10%,” the brokerage said in a note dated September 08.

On the other hand, TCS, which disappointed the Street on the operating front in Q1FY20, saw a sequential margin decline of 90 basis points (bps) due to wage revision and adverse foreign-exchange movements. Analysts forecast a minor decline in full-year margins on increased training and hiring costs. During the quarter, the company added 12,356 employees on a net basis – the highest addition in the last five years.

Kotak Institutional Equities believes achieving double-digit growth for TCS in FY20E will not be easy and will require the support of a strong September quarter. The brokerage, which cuts its EPS estimates by 3-4%, said: “We like TCS’ business model strength and execution but find the stock fully valued at 20X FY2021E earnings.”

Market participants observe that the recent 3.5% depreciation in rupee against the dollar would be a tailwind for the sector, which is battling weak margins amid cut in IT spends by large companies. As on September 16, nearly 63% of the 51 analysts who track Infosys had a ‘buy’ recommendation on the stock, with Jefferies having a one-year price target of Rs 930 per share, compared to the last closing price of Rs 827.70. Only 20 of the 52 analysts have a ‘buy’ rating on TCS, according to Bloomberg.

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