Home >Markets >Mark To Market >Safe havens TCS, Infosys leave Accenture far behind on valuations
The Nifty IT index has risen 37% this year, outperforming the Nifty 500 index by about 42%  (Photo: Mint)
The Nifty IT index has risen 37% this year, outperforming the Nifty 500 index by about 42% (Photo: Mint)

Safe havens TCS, Infosys leave Accenture far behind on valuations

A wider set of global investors are far less excited about the prospects of outsourcing giant Accenture Plc. Its year-till-date returns of 9% are almost the same as that of the S&P 500 index.

The Nifty IT index has risen 37% this year, outperforming the Nifty 500 index by about 42%. Investors in Indian stocks are evidently enthused about the prospects of Indian IT companies. But there is an inconvenient detail they should grapple with.

A wider set of global investors are far less excited about the prospects of outsourcing giant Accenture Plc. Its year-till-date returns of 9% are almost the same as that of the S&P 500 index.

The firm’s revenues are double the size of India’s largest IT services firm, Tata Consultancy Services Ltd. And its share of revenues from digital, cloud and security services are now as high as 70% of revenues, far higher compared to its Indian peers.

On a tangent
View Full Image
On a tangent

If Indian IT companies are expected to gain greatly from the ongoing digital transformation at global firms, and the accelerated shift to Cloud, it is also important to remember that Accenture, with its ahead-of-the-curve investments in these areas, stands to gain equally, if not more. A pertinent question to ask, then, is why shares of TCS and Infosys have done far better.

“It largely boils down to the difference in market composition in India and in the US markets. Tech stocks have been seen as a safe haven post-covid, and since India doesn’t have pure technology bets, investors have been buying stocks of outsourcing firms. The US markets offer a wide array of technology plays, and much of the gains have been captured by stocks such as Amazon and Apple," said an analyst at a domestic brokerage requesting anonymity.

The other factor at play is the lack of decent alternatives in the Indian market. Erstwhile favourites—banking and financial stocks—were shunned by investors over concerns of bad debt. And, in most other industries, revenues and cash flows have fallen sharply. With tech stocks, the drop in revenue has been restricted to low single-digits, giving further weight to the safe haven theory. The fact that Q2 results of TCS and Infosys were ahead of the Street’s expectations has also helped.

But the market-cap-to-revenue multiple of TCS and Infosys now stands at 6.6 times and 5.1 times, respectively, which translates into a 100% and 55% premium over Accenture’s valuation multiple. In end-June, the valuation premium of the two Indian firms stood at 55% and 6%, respectively. To be sure, it’s possible that global investors are under-appreciating gains for outsourcing firms, and that Accenture shares too will eventually rise.

But for this to happen, outsourcing firms will need to demonstrate that their post-covid growth rates are considerably better than pre-covid levels. For now, it looks like the gains in the digital and cloud business is largely coming at the expense of existing tech spends in traditional services. As such, steady-state growth rates post-covid may not be materially different from the high single-digit growth rates of the recent past.

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Click here to read the Mint ePaperMint is now on Telegram. Join Mint channel in your Telegram and stay updated with the latest business news.

Close
x
×
My Reads Redeem a Gift Card Logout