TCS may lose its valuation premium over Infy: Barclays Cap

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TCS may lose its valuation premium over Infy: Barclays Cap

Bhuvnesh Singh, director - head of research, Barclays Capital expects to see similar price movement in IT giants TCS and Infosys post Q3 results.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets

Bhuvnesh Singh, director - head of research, Barclays Capital expects to see similar price movement in IT giants TCS and Infosys post Q3 results.

In an interview to CNBC-TV18, Singh said, "Post Infosys results it was down 7-8% and TCS was hardly 5%, so that is the gap which is being covered right now. From our perspective, both TCS and Infosys are seeing similar trends." However, he feels that TCS may lose its valuation premium over Infosys over the next 12 months.  

Barclays Capital remains constructive on both these stocks from a 12 month view. "We see a 15% upside on TCS and a 25% upside on Infosys from the current levels."

From a longer-term perspective, Infosys is his top pick from the IT space, followed by HCL Tech , TCS and Wipro .

Below is the edited transcript of Singh's interview with Udayan Mukherjee and Mitali Mukherjee of CNBC-TV18. Also watch the accompanying video.

Q: Is 3.5-4% fall in TCS warranted post their results?

A: TCS is just covering the gap with Infosys. Post Infosys results it was down 7-8% and TCS was hardly 5%, so that is the gap which is being covered right now. From our perspective, both TCS and Infosys are seeing similar trends and hence should see similar price movements. The only change that one could have over the next 12 months is, TCS loses its price premium or valuation premium to Infosys as the earnings growth and revenue growth for both companies be similar.

Q: What is the key problem going with the stock today? Is it that the valuations have gotten to too lofty levels compared to what the rest of the sector is up to, or did you hear something in the commentary that looks as concerning as what Infosys had to say?

A: The key problem today is that the markets are very volatile. After the last quarter results, Infosys was up 7-8% and in January we saw them down 7-8%. Market is looking at a very short-term number and hence taking a call. What we see is these companies still remain reasonable growth companies. At USD 7-8 billion we would still expect TCS and Infosys to grow at 15% in the current year.

So is that a problem? 15% growth for a USD 8 billion, I think is pretty good. It is just that market is taking a short-term view. When we take a 12 month view, we remain constructive on both stocks we see a 15 % upside on TCS and we see a 25% upside on Infosys from the current levels. So it is just a short-term investor versus a longer-term trend which is playing on today.

Q: Just stripped of everything on the core volume growth parameter, would you say that the best performance has been struck out by HCL Tech?

A: This quarter yes, HCL tech has formed its niche very well. They are doing very strongly in that. In the HCL Tech numbers, the key thing is not only revenue growth, margin performance or positive commentary from the management. But the key thing is, over the last three years HCL Tech earnings and revenue volatility has reduced significantly.

It is more or less following the same trends as the larger cap names. HCL Tech still trades at 10-11 times forward PE while Infosys, TCS are 15-16 times, so should it catch up?our view is yes, and we remain very positive on HCL Tech today.

Q: What about Wipro that is the only large cap IT name which hasn't spoken yet, what do you expect to see this quarter from them?

A: December quarter should be okay for Wipro. We are expecting 1.5% topline growth in terms of US dollar. On other hand, we expect that in the March quarter they would have similar performance as their peers. Wipro has been a weak performer for the last 12 months in terms of its revenue growth. It has to play a slight catch up on that, March quarter would be one they would start showing a somewhat better growth than what they a have shown in the past 3-4 quarters. However, Wipro faces a more long-term structural issue. We like the management, we like the company's capability, but at least for the next 12-18 months unless we see clear trends we would not be buyer of Wipro.

Q: There are some smaller numbers due today, MindTree and Polaris, any expectations on those faces?

A: We do not cover those names

Q: What is your top buy at this point?

A: Top buy depends on the type of investor we are talking about. From the perspective of longer-term investors, we will continue preferring Infosys, which will be our top pick then HCL Tech followed by TCS and Wipro.