Infosys has higher upside compared to TCS: IDBI Cap

TCS has delivered a strong growth in the fourth quarter, particularly in its digital solutions, despite this not being the best quarter in terms of seasonality, says Urmil Shah, Research Analyst, Institutional Equities, IDBI Capital.Investors should accumulate the stock of TCS with a target of Rs 2,682, he tells CNBC-TV18. His top picks in the largecap tech stocks are Infosys and HCL Tech and believes Infosys can command a valuation of 20 times price to earning multiple by next year. Shah has a target price of Rs 1,381 for Infosys and believes it has higher upside compared to TCS. He feels Mindtree posted significantly better-than-expected earnings in the midcap space with an organic growth of 3 percent quarter-on-quarter (QoQ). On Wipro's earnings, Shah expects a 2.4 percent constant currency growth in its IT services revenue. Large clients and energy verticals will be key for the company's growth, he adds.Below is the transcript of Urmil Shah’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: What is the sense? We are getting contrary views; some people happy that it has broken the jinx of underperformance – Tata Consultancy Services (TCS), but others unhappy that it has disappointed on margins. Which camp are you?A: We are more on the camp that it has delivered good growth in the fourth quarter, despite it not being seasonally the best quarter for the year and we are extremely happy about its execution on the digital solutions where it continues to at a very strong pace. In fact, for the full year, it has grown by over 52 percent and now has a USD 2.3 run rate.Sonia: On a standalone basis that would be fine, but when you compare it to something like an Infosys, then it seems like perhaps, Infosys has beaten TCS, especially in this quarter. What is the sense you are getting about the stock price from here on? Purely because of a slowdown in growth that TCS is seeing on a comparative basis, do you think that Infosys could perhaps outperform TCS over the next 6-12 months?A: That is what exactly we are also recommending. Infosys and HCL Tech are our top picks amongst the IT largecaps. And even on the revenue growth front, we are pencilling in a 14.4 percent constant currency (CC) growth for Infosys, whereas about 12.4 percent growth for TCS on a full year basis. So, we believe that both the stocks have the potential to trade at 20 times on FY17 earnings, TCS has already traded at that. It is almost at that level. I believe Infosys can reach that valuation and that is why we believe that it has a relatively higher upside as compared to TCS.Latha: But both will trade at 20 times? You do not see Infosys stealing a march on valuations as well?A: If you look at the last three years, TCS has traded at between 16 and 23 times, and Infosys has in fact traded, the higher end of the band has been 19 times. So we believe that it will break the range in the last three years and we think it can trade at 20 times.Sonia: What is your target price on TCS?A: On TCS, our target price is Rs 2,682 which gives about 6 percent upside and that is why we have an accumulate recommendation on TCS. Latha: And on Infosys?A: For Infosys, our target price is Rs 1,381 which has about 12-13 percent upside post the upmove it had on Monday.Latha: I know it is an out of syllabus question, but I hope you are tracking Mindtree. What do you make of the numbers?A: The Mindtree numbers were also a beat. In fact, it was a beat to the toned down expectations. So, management clearly attributed that the adverse impact which they were expecting, they were much lower than what they were expecting it to be. So, organic growth of 3 percent on a quarter-on-quarter basis is clearly the best till now. Of course, it is not as large as Infosys or TCS.Latha: So, what would your price target be on that stock?A: We do not have an active coverage and so, will not be able to give a recommendation on Mindtree.Sonia: What about Wipro? The numbers are expected, there is a dollar revenue growth expectation of almost 3 percent – 2.8 percent. How are you positioned on that stock ahead of numbers?A: For IT services, revenue of Wipro, we are expecting a 2.4 percent constant currency growth. We believe that they should be able to achieve that. More importantly, we would want to see if they are looking at getting back to the industry growth rate in the next year because the acquisitions itself would provide around 5 percentage points growth to the company in the next year. So, for Q1, we are expecting a guidance of 3-5 percent which would imply an organic growth rate of 1-3 percent. So, we would watch out for that and we would also watch out for what is the growth in their large clients and also on energy vertical which has impacted them in the last year.