Moneycontrol
Last Updated : Oct 14, 2015 02:58 PM IST | Source: CNBC-TV18

Infosys top pick but TCS remains an add: Kotak Equities

For Kawaljeet Saluja of Research at Kotak Institutional Equities, Infosys remains a top pick backed by accelerated growth. However, TCS still remains an add.

With Infosys slowly but steadily closing the gap with country's largest IT company TCS there are now doubts whether TCS would manage to stay ahead of the curve. For the past few quarters TCS has disappointed.

Kawaljeet Saluja, Executive Director & Head of Research at Kotak Institutional Equities still has a add rating on the stock although the house has cut its target price from Rs 2800 to Rs 2675 because the execution is still strong and the management alluded to a robust order book. The companies focus on digital services also seems to be paying off, said Saluja.

The house has also cut down the multiple from 20 to 19 times.

Tata Consultancy Services (TCS) has registered a 6.1 percent sequential growth in consolidated profit at Rs 6,055.2 crore during July-September quarter. Profit and volume growth met analysts' expectations but revenue missed forecast for the fifth consecutive quarter.

However, their top pick in the sector remains Infosys and would not be surprised if some money moves out from TCS into Infosys.  Growth for Infosys continues to accelerate and the management seems to be doing the right things, said Saluja adding that the convergence in growth versus TCS will happen this year itself.

According to him, the disappoint from TCS could be a combination of various factors like higher exposure to run the business services, portfolio issues and growth is also a function of exposure to various clients.

Below is the verbatim transcript of Kawaljeet Saluja’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Latha: Tata Consultancy Services (TCS) stock is down 2 percent in pre-opening trades. At Rs 2,500 is it a buy for you?

A: We have add rating on this stock and we yesterday cut down our target price from Rs 2,800 to Rs 2,675 and cut down the multiple a little bit from 20 to 19 times. I am maintaining add because the company’s execution continues to be strong and they seem to be doing well in digital services. On top of that the management did allude to the fact that orderbooking -- one of the key business metrics -- are in robust health.

Sonia: I wanted to come to you on the trade between TCS and Infosys now because this quarter we have seen that barring the volume growth, Infosys has done better than TCS in all parameters. Do you expect a shift of money out of TCS and in to Infosys now?

A: The growth rates for Infosys is accelerating. Company seems to be doing the right things. The convergence in growth versus TCS will happen in this year itself. I would not be surprised if some of the money moves away from TCS, which has been disappointing now for four to five quarters. Some of the money moves from TCS to Infosys.

Latha: What about the management commentary. How much weightage would you give? Menaka Doshi tried her level best but N Chandrasekaran would not be drawn into anything company specific. He was more strong about, positive about the industry though of course they have been extremely positive on their orderbooking. Do you see TCS giving better numbers for FY17?

A: First and foremost it is important to dwell into what could have been the reasons for underperformance of TCS or marginally disappointment quarter after quarter. There are few factors which may be hurting TCS. One is the fact that the company has a higher exposure to run the business services, which is facing a lot of the pricing pressure and there is a fair bit of cannibalisation.

The second could be portfolio issues, which the management has called out from time to time in the past. At the end of the day the growth is also a function of what kind of exposure do you have to various clients. Combination of these things would have pulled down the growth rates of TCS.

Moving into FY 2017 the way we see growth for TCS is that we are expecting roughly a similar growth in constant currency as compared to 2016, which is 13 percent odd. Our belief is that in the next year for TCS' run the business (RTB) services will grow slower but digital will continue to be a growth driver for the company as such.

Latha: Looking at the TCS performance would you want to re-think your valuations for Infosys simply because people will be willing to bet more and some money would shift. Have you changed your price forecast for Infosys as well are you now beginning to have some doubts over the other IT majors and up your preference for Infosys a little more?

A: Infosys has been our top picks so there is no change in preference on this stock. As far as your question on TCS’ performance, raising doubts on the growth of the sector is concerned and the way I look at it is that at the beginning of the year the entire street was pencilling in a significantly higher growth for TCS and HCL Tech and a lower growth for Infosys.

At the beginning the Cognizant estimates were also fairly conservative. What has happened is that the sector growth has remained unchanged. The sector will still grow at 12-13 percent. However, there is a share shift. So, in a way your estimates on TCS and HCL Technologies have gone down. However, revenue growth estimates on In fosys and Cognizant has gone up. So, it is more, what I would say a shift in share across different companies which are influenced by portfolios and whole host of other factors rather than the change in the industry growth in itself.

First Published on Oct 14, 2015 10:10 am
Sections