Infosys vs TCS: Which IT stock is the top pick post Q4 results?

Tech bellwether Infosys's revenue increased a smaller-than-expected 16 per cent to ₹37,441 crore in the fourth quarter of FY23, while its profit of ₹6,130 crore missed analysts' expectations.

The revenue growth in constant currency for FY23 came in at 15.4 per cent, ultimately fell short of that forecast of 16 per cent-16.5 per cent.

The country's second-biggest software services firm expects to post revenue growth of between 4 per cent and 7 per cent, on a constant currency basis, in the year ending March 2024. That compares with an average analyst estimate of 10.6 per cent.

"Unplanned ramp down of projects, delay in decision-making and some one-off revenue impacts, including a few client-specific project cancellations, hit revenue growth in Q4, leading to the revenue-guidance miss," highlighed analysts at Emkay Global Financial Services in a research note.

Infosys's also posted disappointing operating performance in the March quarter, highlighted analysts from Emkay Global Financial Services.

The Bengaluru-based company's operating margin fell to 21.1 per cent in the quarter, and is expected to stay between 20 per cent and 22 per cent this fiscal year.

Meanwhile, Infosys's bigger rival Tata Consultancy Services (TCS) delivered a soft quarter, impacted by weakness in North American geography (>1 per cent impact on overall revenue estimated) on higher exposure in the BFSI vertical and the ensuing headwinds.

Quarterly net profit rose 14.8 per cent to ₹11,392 crore. Its January-March order book stood at $10 billion, down 11.5 per cent from a year ago, but with an "all-time high number of large deals."

What should investors do

Infosys stock

Emkay maintains a 'Buy' on the stock, with a revised target price of ₹1,620 per share from ₹1,700 earlier factoring-in the disappointing Q4.

What the brokerage liked: Strong FY24 revenue growth guidance, moderation in attrition (LTM attrition down 340bps QoQ to 20.9%/quarterly annualised attrition down by >400bps QoQ), steady deal intake, healthy cash generation (73.5% OCF/EBITDA in Q4).

What the brokerage didn't like: Operating performance miss in Q4, lower-than-expected margin guidance.

Brokerage Religare believes that Infosys' growth may temporarily be muted as it generates 61 per cent and 30 per cent from the American region and Financials service segment.

The brokerage has maintained a ‘Buy’ rating on Infosys but has revised its target price downwards to ₹1,855, assigning a PE multiple of 23 times on FY25 EPS.

TCS stock

Centrum broking said that TCS's management has attributed the lower than expected revenues/margins to a slowdown in discretionary spends which impacted revenues while costs remained sticky. The brokerage expects TCS's revenue/EBIT/PAT to grow at 9 per cent/13 per cent/13 per cent between FY23‐25E and maintains 'Add' rating for the stock with a revised target price of ₹3,541.

Domestic brokerage HDFC Securities has also maintained a 'Add' call on the stock with a target price of ₹3,610.

Brokerage Emkay has retained a 'Hold' call on the stock with a target price of ₹3,300 per share.

IT stocks play spoiler

Weak trends in IT counters and fall in the overnight US equity markets triggered by fresh concerns over recession put a check on market's uptrend.

Infosys Ltd, Tech Mahindra Ltd, and HCL Tech Ltd fell over 2 per cent each, and were the top losers in the Nifty 50 index in Thursday's trade.

"While weak commentary from TCS put pressure on the IT sector, which was down 2.2 per cent. Nifty closed in positive territory for the ninth consecutive day and has now touched its 7-week high. Consistent weak numbers from TCS and Infosys would keep the technology sector under pressure," said Siddhartha Khemka, Head - Retail Research, Motilal Oswal.