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 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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Article Written by
Salman Hashmi