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Last Updated : Jul 21, 2015 02:01 PM IST | Source: Moneycontrol.com

Infosys set to bridge valuation gap with TCS: Analysts

Infosys' first quarter dollar revenues in constant currency terms surged 4.4 percent to USD 2.25 billion, ahead of both the previous quarter's number and analyst forecasts.

Moneycontrol Bureau

India's second-largest IT services firm, Infosys, posted a robust set of first-quarter earnings numbers that reiterated the notion that a transformative effort being led by CEO Vishal Sikka is producing effort and that will bridge the valuation gap between itself and leader TCS sooner rather than later.

Early Tuesday, the company informed exchanges its first quarter net profit fell 4.5 percent sequentially (the first quarter is seasonally weak) to USD 476 million, in line with estimates, but dollar revenues in constant currency terms surged 4.4 percent to USD 2.25 billion, ahead of both the previous quarter's number and analyst forecasts.

The better-than-expected first-quarter revenue figures are likely to help the company notch up its 10-12 percent annual growth target in fiscal 2016 and leads to hopes the company will be able to get back to industry-level growth in a couple of years.

"This is definitely a good performance after a long wait. It appears that after Dr Sikka's appointment, the focus on high-growth areas is clear and they have made right deployments," Sandip Agarwal of Edelweiss told CNBC-TV18.

Agarwal pointed out to other metrics -- such as 5.4 percent volume growth and a sharp fall in attrition -- as other key positive to emerge out of results.

After he was appointed as CEO, Sikka has looked to boost investments into new areas as digital, cloud and analytics as well as introduce greater efficiencies into its bread-and-butter business through innovations such as automation and design thinking.

During the first quarter, Infosys also raced past peer TCS on the revenue growth front -- the latter's dollar revenues in constant currency terms were up 3.5 percent.

Nilesh Shah, CEO of Envision Capital, said that there was a high probability that the valuation gap between TCS -- which has grown considerably faster over the past decade -- and Infosys would narrow.

On a price-to-earnings multiple basis, TCS trades at 21 times forward PE while Infosys is at 17. A PE rerating would lead to the stock price to expand.

"Absolutely. The valuation gap could narrow or even vanish over the next few quarters," he said.

Infosys was the bellwether Indian IT company during the 90s and early 2000s and enjoyed a valuation premium after which TCS donned that mantle.

"Probably that stage has come for Infosys right now [where it is the most chased stock among IT companies]," he added. "Infosys had a long period of under-performance, which may now turn into outperformance. For an investor, it makes senese to stay in and ride the whole rerating story."

Written for the web by Nazim Khan

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First Published on Jul 21, 2015 10:00 am
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