Infosys beats street estimates: Does that mean TCS won't?

Infosys's better-than-expected Q2 numbers should not be read as the IT major eating into other players' (read: TCS) revenues, says CNBC-TV18's Udayan Mukherjee.

"The key point is whether Infosys is getting back to, at least, HCL Technologies kind of growth parameter. HCL Technologies was expected to grow at 14 percent in FY14. With these numbers, Infosys will get very close to those kinds of growth numbers—maybe 12-13 percent, if they are lucky, 13-14 percent," he says. Below is an edited transcript of Mukherjee's comments on CNBC-TV18 On Infosys Vs TCS
Tata Consultancy Services (TCS) and Infosys were already chugging along at a fairly healthy clip. I don’t think that a few million dollars here and there between the three companies means that they are eating away each other's shares. So I would not read too much into the fact that Infosys is eating other people’s revenue. I suspect you will find that TCS and HCL Technologies will also report fairly healthy numbers.
The key point is whether Infosys is getting back to, at least, HCL Technologies kind of growth parameter. HCL Technologies was expected to grow at 14 percent in FY14. With these numbers, Infosys will get very close to those kinds of growth numbers—maybe 12-13 percent, if they are lucky, 13-14 percent.
So if that happens, should Infosys now be trading at a much higher valuation level? That is the key. It is too early to start saying Infosys has gone up and therefore TCS should come down. The valuation gap will probably get closed because of Infosys going up rather than TCS coming down.
You will probably find that the TCS has another good quarter this time around and probably report dollar revenue growth of more than 4 percent, which will still be a premium to Infosys. So I don’t think it is time to be bearish on TCS. It is just that TCS is owned by everybody, its valuations are super premium to the sector and therefore, the juicier trade might be to take that extra bit of risk and to go into a good company. Infosys is no smallcap or midcap; it is a very largecap name, which trades at a very healthy discount to the sector leader. Therefore, the more attractive trade for a lot of people might be to say: “let me just switch a little bit away and put it into Infosys where the returns might be slightly superior in relative terms”.
So I don't think it is time to be bearish on TCS, although the yardstick goes up for them to maintain that 22-23 kind of P/E multiple. They now need probably to demonstrate 5 percent kind of dollar revenue growth compared to the 3.7-3.8 percent that Infosys has just demonstrated. On the IT sector
IT is doing very well right now. There is no question about that but look at the stock price performances. TCS is up 33 percent over the last three moths—and these are largecap names. So the stocks have already done quite a bit and therefore you have seen a bit of a pause. Periodically, you might see some pauses coming along as valuation expansion gets digested.
But from a performance point of view, I think the rub of the green is very much with them. And on declines, if you buy IT, though it is a crowded trade, I think it is a trade which has still got the potential of generating returns. But whether it will do that in the 10-days timeframe or 15-days timeframe is difficult to say because these stocks are serious outperformers in any case relative to the market. But as seen with Infosys, which nobody wanted to own even six months back, they still are chugging along very nicely.
In rupee terms, more than 20 percent revenue growth expectation for the year is something which very few Indian companies are able to do in the kind of economic environment that we are trading in today.