Expect Infosys to bounce back in FY14: Antique Broking

Pratish Krishnan, IT analyst, Antique Broking expects Tata consultancy Services (TCS) to grow at a faster pace than its peer going ahead. "We are looking at a 19% plus earnings growth for TCS over the next two years. Our target multiples for TCS is at around 18 times FY14," he said in an interview to CNBC-TV18.

TCS reported slightly better-than-expected results for April-June compared to its closest competitor Infosys, which disappointed the street with a lower-than-expected quarterly profit and a sharp cut in its full year US dollar revenue guidance. However, Krishnan expects Infosys’ growth to rebound in FY14. "I would still peg a multiple of 15 times for Infosys. Though one would have to wait a quarter or so, more for the stock to show some kind of reaction," he added.  Below is the edited transcript of Krishnan’s interview with CNBC-TV18. Q: Can you just give us a sense or paint a picture for us in terms of the qualitative aspects between the two managements- if you heard them out in terms of what is the difference between Infosys in this quarter vis-à-vis TCS hence what could you possibly extrapolate from their body language etc going into FY13? A: At least in terms of the one big change that we have seen in the quarter for Infosys has been the growth in volumes during the quarter, which came as a big surprise. I don’t think the street was looking at 3% plus kind of a volume growth which has been a big positive during the quarter. Otherwise the basic tone is that the macro has been subdued for Infosys whereas TCS continues to be quite bullish. A big surprise is that even sector like banking financial has seen a strong growth for TCS, which is positive for the sector point of view. Even for Infosys we did see that the decline has been much lower than what the street was looking at. We are seeing some signs of positivity, but the overall macro continues to be bit of caution today. Q: The shocking part is scrumptiously Infosys pricing has declined by 3.8% and it is not terribly different, TCS has also pricing down 1%. There seems to be quite clearly an under cutting and a price war that is about to begin or has already begun. Would you therefore be cautious about the entire sector? A: On pricing there is some concern, but it is too early to give it a broad sector view. Even for Infosys my sense is if one adjusts for the revenue hit they have taken of USD 15 million, the pricing cut is just around 2.8-3%. One can attribute this to change in revenue mix which has happened for Infosys and also in terms of expansion to the lower margin infra management and BPO segments. I would probably still give it a benefit of doubt. But I wouldn’t say its broad based worry at this point of time. _PAGEBREAK_ Q: How we have seen the earnings performance in the past couple of quarters do you think that they have just hit a ceiling at this point in time and maybe there needs to be some amount of cash utilization, more aggressively on the inorganic front or to switch things around something to take them to the next leg? A: In some segments they probably need to do more. For example BPO and infra management are areas which is a high growth segment but the contribution of these segments to Infosys is pretty lower so at least in BPO space they can do more. But having said that, the volume growth was much stronger and I will rule out that part and it will keep oscillating during the quarter. Q: How would you give assigned valuations now to Infosys and TCS? Would you value Infosys now at maybe 13 times, close to other market players? Would you really dare to give TCS as much as 20 times, which some people are doing? A: Our sense is that TCS growth would be much faster than peers, so we are looking at a 19% plus earnings growth for TCS over the next two years. Our target multiples for TCS is at around 18 times FY14. For Infosys we have pegged it at a discount to TCS. But my sense is growth will rebound in FY14. The guidance that Infosys has given, even if one assumes the quarterly run rate to continue, probably one should see good amount of growth coming back in FY14. I would still peg a multiple of 15 times for Infosys. Though one would have to wait a quarter or so, more for the stock to show some kind of reaction, but I would still give higher multiple. Q: In the meanwhile you would think that the likes of an HCL would trade at a higher valuation? A: HCL in terms of revenue growth would still be stronger. But we are slightly caution into the margin outlook there so I wouldn’t peg a higher multiple compared to Infosys. Q: In terms of a pecking order from the top brass of the IT space which companies do you think are best placed right now in terms of just to counter the entire global slowdown that we are seeing – what would your pecking order be? A: My pecking order will be TCS, which has been our preferred pick in the sector so TCS continues to be number one, followed by Infosys and Wipro. Among the smaller ones we have Hexaware, for which we believe the revenue growth will be much stronger over the next two years.