TCS valuations too high; tough to sustain level: Equirus

Tata Consultancy Services (TCS), India's largest software services exporter met expectations and posted  a net profit of Rs 3,280.5 crore, up 11.87% quarter-on-quarter (QoQ). Earlier in the day, another IT major Infosys had declared its results and it had highly disappointed the street. Comparing the performances of both IT heavyweights, Bhavin Shah, CEO of Equirus Securities said, though the numbers registered by TCS are better than Infosys, it is reflecting a situation where the industry is facing slower growth rates.

Despite the high valuations of TCS, Shah tells CNBC-TV18, there will be an uptick in the stock on the back of these results. However, "We believe that the valuation TCS is demanding is very rich and the forward growth rates clearly are falling. It will ultimately mean that upside from these levels on a sustainable basis is going to be very difficult," added Shah. Below is the edited transcript of the interview on CNBC-TV18.   Q: TCS numbers managing to beat expectations, dollar revenue in fact exceeding expectations, your first reading of the numbers?
A: These numbers are pretty good when you compare it to what Infosys reported. But I would say that these numbers also emphasize that the industry is facing slower growth rates. Expectations have come down sharply, so we obviously get positively surprised or excited with a 3% growth.
If it's 3%, we are talking about low single digit kind of growth rates which translates to annual growth rate of may be 10-12%. At most, it could lower to mid teens and that is the key issue facing the industry. Q: Overall macro concerns, especially from the global front are slightly shaky. In that light, how do you term the performance of the IT pack now?
A: I think the global factors are one of the issues. But we have seen these growth rates for the IT pack coming off even when the US economy was on a bit of an upswing. If you go back three quarters, essentially from the September quarter last year we have seen this downward shift in growth rates.
We believe it is not just about the global macro. It has to do with maturing of the industry and for the deflationary trends that the industry is facing along with increasing competition. We also believe that a cloud computing is having deflationary impact. Also read: TCS may grow by mid-double digits in FY13: Angel Broking TCS rubs salt in Infosys' wounds with strong Q1 earnings
_PAGEBREAK_ Q: According to analysts, the TCS stock specifically, is trading at a high premium. How would you rate TCS going ahead and also the management has said that the global environment, the global corporation has been good for the company. But there have been a few concerns regarding its verticals, specifically the BFSI sectors performance, all these factored in how would you rate TCS?
A: TCS obviously has been delivering stronger numbers compared to Infosys and I think that is very much priced in. Now you might temporarily see a little bit of an uptick in TCS on the back of these results. But we believe that the valuation TCS is demanding is very rich and the forward growth rates clearly are falling. It will ultimately mean that upside from these levels on a sustainable basis is going to be very difficult. Q: Also TCS management is saying that there is unprecedented volatility in the currency space. They are taking steps to mitigate risks that arise from this currency volatility, but that is something that the entire industry should be concerned about. In that light, what do you see happening next because the rupee volatility is clearly continuing for some months now?
A: The companies are by and large becoming much more nimble about their currency strategies. We have not seen any companies take any aggressive bets unlike 2008-09 where some companies had to suffer from that for a very long period. One thing is for sure that even though currencies are volatile, companies are in general benefiting from the overall fall in rupee. The bottom-line is positive for the companies on an overall basis. Q: Infosys earlier on in the day came out with a disappointing set of numbers. How are you reading Infosys' performance and going ahead, what do you expect?
A: If you listen to the top management, they keep talking about focusing on a higher quality growth. I think they are giving up some business opportunities where they see higher risk, either through balance sheet or through other ways. That is one of the reasons also why they are continuing to report weak growth rate.
I think the stock price needs to adjust for that and while there was a sharp correction today, we would still see more downward adjustment in the share price because of the kind of growth that the company is able to generate.