Post Q4, prefer Infosys to TCS: Prabhudas Lilladher

The sterling results posted by IT major Infosys makes it a preferred pick over rival TCS, which is slated to post its own results later today, says Prabhudas Lilladher IT Analyst Govind Agarwal.

In an interview with CNBC-TV18, Agarwal said he had a price target of Rs 1,540 on Infosys, as he expects the stock to start trading at 20 times expected FY18 earnings, compared to 19 times for TCS.

He also spoke on the US court verdict that slapped a USD 940 million fine on TCS, and maintained that it would be a major negative for the stock and that the penalty may be reduced when the company challenges the verdict in a higher court."The highlight definitely from the results that came out on Friday was the guidance," Macquarie's Nitin Mohta told CNBC-TV18 in another interview. "Data [from other earnings numbers] give us enough confidence that Infosys should be able to grow towards the upper end of its guidance."

Below is the transcript of Govind Agarwal and Nitin Mohta’s interviews with Sonia Shenoy and Latha Venkatesh on CNBC-TV18.Sonia: What is your view on the stock now? Do you think that the valuation gap between Infosys and Tata Consultancy Services (TCS) could narrow further and what could the upside be over the next 6-12 months?Agarwal: On Infosys, the numbers were good and the guidance was above street expectations and National Association of Software and Services Companies (NASSCOM) number also. And given the outperformance of Infosys against TCS in the last few quarters, we would expect the multiple of Infosys to expand vis-à-vis TCS. Currently, they are almost at same price-earnings ratio (P/E) multiple on FY18 earnings. So, I would expect about 5-10 percent outperformance on P/E multiples by Infosys over the next six months or so.Latha: So currently, what would be your price target?Agarwal: My price target on Infosys is Rs 1,540 which is 12 months forward price target. And based on 20 times FY18 earnings per share (EPS).Latha: Just for a trader, even today would be a gap-up opening? The stock actually ran up a lot ahead of the numbers, but do you think that there is still space today and in the near-term?Agarwal: Actually, stock corrected a bit in the last few days. And it was weak even with the results. And given the move, I would expect about 4-5 percent move in the domestic stock today and around Rs 1,250 in the short-term. But I would say, with a one year view, 20 percent upside can be made on the stock, even after today’s close. The company is back on track with an industry leading growth in FY16 and a guidance of higher growth in FY17.So, company is doing well. We will start to see benefits of automation coming in late FY17 or FY18. If they can deliver on those things, we can see much more upside in the next 2-3 years.Sonia: Wanted your view on TCS as well. As we head into the numbers, later today, what is the expectation and between Infosys and TCS – I know it is a no-brainer now, most people prefer Infosys, but what is your own pick?Agarwal: Between Infosys and TCS, both the companies are fundamentally solid companies. But, given the outperformance of Infosys against TCS, we prefer Infosys over TCS.Latha: But TCS has a couple of things today. So, would you rate that USD 940 million fine as a big overhang? Do you see the stock dipping considerably? Would you be worried as an investor?Agarwal: This USD 940 million verdict, first of all, is not the final verdict. It is a trial jury verdict and the final judgment is yet to come. As far as our understanding of the case is and it is very limited right now, TCS has downloaded few documents which are mostly user manuals and stuff which are used for training or using of any software. So, to us, it does appear that the penalty is very steep and it will likely be lowered by the final judge agreement. And even company has denied any wrong-doing on their part and they have repented vigorously. So, I do not think stock will react a big negative. Some negative, obviously will be there, but not a big negative.Latha: What multiple will you give Infosys now and what multiple are you giving TCS now?Agarwal: Multiple on Infosys is currently 20 times for the target multiple and TCS is 19 times multiple.Sonia: 20 times for FY17?Agarwal: Our price target is one year forward. So, it is on FY18 earnings.Latha: What is your take Infosys guidance gives you courage to up the price target by how much?Mohta: The highlight definitely from the results that came out on Friday was the guidance. If I can tie in couple of other forwarding looking data points, so if you look at the total contract value that they have announced as well as the salary hike which interestingly after a gap of many years we are seeing a double digit hike at the higher end. So, those data points give us enough confidence that Infosys should be able to grow towards the upper end of its guidance. We already were baking in a 13 percent growth for next year, so there is no change to our earnings per share (EPS). However, we now value the company on March 18 estimates and based on that we see a Rs 1,530 target price on the stock. Sonia: What about your view on Tata Consultancy Services (TCS)? Do you think that Infosys will sort of narrow the gap and may be even supersede TCS as far as valuations are concerned? Over the next one year what do you see the valuations for both the companies?Mohta: My view is that the valuation gap pretty much has been bridged now and while we are positive on Infosys we are not really calling out for Infosys to trade at a premium multiple to TCS. FY17 we might see Infosys doing better as compared to TCS. However, sustaining a premium multiple over a longer period of time is possible only if you have that visibility for more than a year. So, trying to just take FY17 number and then trying to assign a higher multiple to Infosys might be a little optimistic in my view.Latha: Isn’t it enough that they have outperformed TCS for the last three quarters, we don’t know about the fourth? However, if you looked at the revenue growth TCS in quarter one was 3.5 percent; Infosys was 4.5 percent, in the second quarter TCS was 3 percent, Infosys was 6 percent, in the third quarter TCS flat, marginally negative, Infosys still squeezed out a 0.6 percent and now 1.6 percent. On the street what is the revenue expectation? I thought 1.4?Mohta: For Infosys, they pretty much came in line where expectations were if I am not mistaken about that. The numbers that you have mentioned, on the sequential growth number and Infosys has done a better job but then they had to given the kind of re-rating that we have already seen. So, sequential revenue growth was better but if you look at a year-on-year comparison I don’t think that the gap is that big at least at this point of time that Infosys decides to or starts trading at a premium multiple to TCS. As I said this is more of a one year view. You might obviously have a quarter or two where Infosys valuations might actually start inching upwards as compared to TCS, so that is how I would play it. When stock is already up at 6-7 percent incrementally what do you do from here that also backs our question how much of that better growth is already being discounted by this price move.Sonia: You also track Mindtree that stock is up 7 percent ahead of its numbers today. What are the expectations and are you bullish on the name?Mohta: From a midcap pack perspective the company has done a very good job in doing very well on its niche of consumer packaged goods (CPG) and retail as well as doing a decent job on the margins front. We have neutral rating on the stock and not really very different from the consensus. The concern that I have on them is a bit of the growth has been driven by the inorganic acquisitions that the company has done. They also report tonight let us see what they have to comment about FY17.Valuations at this point of time seem to favour the largecap names where you have the likes HCL and Tech Mahindra trading at lower multiple as compared to where even Mindtree is trading at. So, if you were trying to get into the midcap IT names one need to budget for a room for error which at this point of time Mindtree I would see it as fairly valued. Latha: What are you expecting from TCS in any case today?Mohta: TCS we are baking in a 1.9 percent dollar revenue growth on a sequential basis and about a 50 basis point margin improvement at EBIT level because they won’t really have the impact of Chennai floods as well as the rupee depreciation helping them in this quarter. I am sure a lot of time on the call could also go in to the adverse ruling that they have got in the US over the weekend. That is what is likely going to dominate it. Even thought TCS doesn’t give guidance I am sure all of us will try our best to try and get some insights from N Chandrasekaran in terms of how he sees FY17. Sonia: What are your top picks in the sector now and what are the target prices there?Mohta: We like TCS and Infosys, definitely those are the most favoured at this point of time. We will follow that up with the HCL Technologies and Tech Mahindra.