Market analysts still prefer Infosys over TCS
Mumbai/Bengaluru: Even as Tata Consultancy Services Ltd (TCS) touched a $100 billion market cap milestone on Monday, more analysts are advising investors to sell its shares compared with Infosys Ltd.
According to Bloomberg, out of 50 analysts tracking TCS, eight have sell ratings while Infosys has six out of 52 analysts. TCS has 19 “buy” and 23 “hold” rating while Infosys has 37 “buy” and six “hold” ratings.
Analysts are cautious about TCS’s steep valuations and pressure on profitability even though the company’s management has retained its aspirational profit margins guidance of 26-28% in the current financial year.
TCS ended with 25.8% operating margin in the year ended March 2018.
The TCS stock now trades at 22.94 times one-year forward price-earnings while Infosys trades at 17.16 times of one-year PE.
On Monday, TCS also overtook outsourcing and consultancy giant Accenture Plc which has a market cap of $98.20 billion. However, Accenture ended fiscal 2018 with revenues of $34.90 billion, far higher than TCS’s annual revenue of $19.1 billion.
Shares of TCS have surged over 30% so far this year, gaining nearly 8% in the last two trading sessions alone after its earnings announcement. The BSE IT index is up 20% in 2018 so far.
On Thursday, TCS said its dollar revenue increased 3.9% (2% in constant currency terms) to $4.97 billion in the quarter. Net profit improved 5.7% to $1.07 billion in the March quarter from $1.01 billion in the preceding three months while operating margin improved 20 basis points to 25.4% from 25.2% in the October-December period.
Nomura finds valuations of TCS to be expensive at 20 times projected fiscal 2020 earnings and sees risk to street expectations of double-digit constant currency revenue growth and flattish margin. The brokerage firm has a cautious stance on the stock due to sluggishness in large segments, margin pressures and expensive valuations.
TCS large segment US and BFSI remained weak and Nomura expects that it is likely to grow at low-to mid-single digits year on year with clarity on BFSI still a quarter away amid risks from insourcing at a large US bank.
Kotak Institutional Equities said on 20 April, that the stock trades at 19 times fiscal year 2020 estimates earnings. “To put valuations in context, TCS requires incremental revenue addition of $2.1 billion per year in FY2019 estimates and about 11% CAGR in incremental revenues over the next 7 years to justify the price”, the report added.
On 13 April, Infosys reported a 1.8% sequential rise in dollar revenue to $2.8 billion, allowing it to end 2017-18 with $10.94 billion in revenue, a 7.2% year-on-year growth, and 24.3% operating margin. In constant currency terms, it managed a 5.8% growth, which was lower than industry body Nasscom’s estimate of 7.8% growth last year.
According to PhillipCapital, Infosys reported decent earnings. Its revenue growth and total contract value were encouraging even as it reported weak margin outlook. The firm is positive on Infosys, on the back of improving business metrics and the significant valuation gap versus TCS.
“Assuming Infosys achieves mid-point of its guidance, it will report CC organic growth similar to TCS. Despite that, the stock trades at 14x FY20 – a significant discount to TCS (19x). We expect the valuation gap to narrow over the next two years, with a smooth management transition and dealflow boosting growth for Infosys”, Phillip Capital said in a note to its investors.