IT sector: TCS could steal the show in FY13, says JPMorgan

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IT sector: TCS could steal the show in FY13, says JPMorgan

Infosys posted a good performance for the third quarter of FY’12. Viju George, executive director of JPMorgan says, 2012 could be another year of polarisation in performance for the IT sector. “TCS could steal the show once again in FY13. There could be polarisation in stock returns as well,” he adds.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ News and Notices about TCS See interviews with TCS Management See what other Experts & Brokerages are saying about TCS See previous Results of TCS TCS BSE | NSE 31/05/12 Are Mutual Funds betting on TCS? Other Stocks in this news Infosys |

Infosys posted a good performance for the third quarter of FY'12. However, the company disappointed with its dollar revenue guidance for the fourth quarter.

Viju George, executive director of JPMorgan says, 2012 could be another year of polarisation in performance for the IT sector. " TCS could steal the show once again in FY13. There could be polarisation in stock returns as well," he adds.

He expects TCS to sound relatively more positive on demand environment than Infosys.

For Infosys, he doesn't think too much of further derating is possible from here.

Don't miss: Why did Infosys cut its FY12 dollar guidance?

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

Q: You were disappointed with the Infosys guidance. Have you marked down expectations on Infosys now, both in terms of growth and earnings?

A: I think we have brought down our numbers largely on the dollar front for Q4 of this fiscal and for FY13. In rupee terms, there is not too much of an impact because we were expecting a stronger rupee. But that's probably is not the case now. So, when you take it from rupee perspective, the EPS estimates probably remain largely unchanged. The hit is taken on the dollar revenue front.

Q: Should one extrapolate what Infosys said about the uncertainty about the industry or would you say that there are Infosys specific issues which have prevented them from giving even modestly positive guidance for the Q4?

A: I think this is the kind of question that investors have been raising since yesterday. Our view is that 80% of the issues confronting Infosys are very Infosys specific. We would not extrapolate that to the rest of the industry.

Based on some of the channel checks we are doing with Infosys' peers, I don't think that they are having such a bad time as Infosys makes it out to be. There could be some pressure that Infosys is facing from certain key clients, be in the financial services vertical, be telecom vertical. That may be weighing on the guidance more than anything else.

I don't sense an industry wide slowdown. I don't sense that this is cutting across sectors and across clients. If you see Europe, which is a cause of uncertainty and worry, as far as demand goes, faired very well for the Infosys in the quarter that just went buy. I think this is largely an Infosys specific issue. We wouldn't have to wait for too long, TCS announces on coming Tuesday and we should get to know by then.

Q: When we spoke to the management about whether they would relent on pricing to stoke up volume growth, they seemed quite confident that they should be sticking to the value proposition that they have been working on. Do you think the company then runs the risk of protecting margins and actually lagging some of its peers in terms of volume growth, even in FY13?

A: I think this is something that we have been seeing quite consistently. Focusing on high value proposition is fair enough, they continue to get price increases or realisation increases. It's commendable, if they will be able to do that. But it is coming at the cost of volume increase. I think it is.

If you look at the nine month period ended FY12 and compare it to the same nine month period in FY11, you will find that the overall volume growth is just likely about double, just 11% to be precise. The trade offers being made in favour of pricing growth.

What this is resulting in my view is revenue growth being pulled down. You will find Infosys perhaps not outperforming industry in this year and possibly next year based on what we project. So, a high price proposition is fine, but what is the use of that if it doesn't help you go ahead of the industry. So, we think that Infosys needs to walk this line better.