TCS, Infy both may deliver 20-25% return for CY14: IDFC Sec

Below is the verbatim transcript of his interview on CNBC-TV18

Q: The dollar revenue growth for Tata Consultancy Services (TCS) at 3 percent left the market a bit wanting but would this quarters performance disappoint you or would the positive management commentary enthuse you to buy the stock at this point?

A: If you look at the quarterly results, revenues were clearly a little softer than what the street was expecting it to be but if you dissect the revenue into domestic and international business then international business has delivered in line or a tad better than what was the expectation. While domestic revenue have disappointed and which is what management also said on the concall that an 8 percent decline on the domestic revenue is very unusual for this quarter because typically in the second half of fiscal year domestic revenues do well.

What they said is primarily because of the election time, as also government focus to contain the government spending during this fiscal year is putting pressure on the IT spending in India this year. This is likely to continue in Q4 as well and probably could continue for another quarter or two before it recovers.

So to that extent I am not very disappointed with the results, was just disappointed with the domestic part of the business which was also known post the CMC results. However, the international business was inline or better than expectations. So good set of numbers and this is the management which has been upbeat but has delivered on what they have said so would go with whatever was the management commentary and continue to like this name here.

Q: What is your key takeaway from what the TCS management said?

A: Key takeaway is management saying that this calendar year is going to be better for IT spending globally, better than what it was last year and to that extent FY15 would be a further growth acceleration from what they had delivered in FY14.

This is also what management said last year and last year when they grew 13 percent, most of the street numbers were between 14-15 percent. But as the year is coming to a close they would deliver almost a 16 percent dollar revenue growth.

The street number could move to 17-18 percent for FY15 and which is what would keep the valuation buoyant beyond whatever is today’s reaction to the results.

Q: So you don't see a narrowing of valuation gap between TCS on one hand and Infosys, HCL on the other?

A: Between TCS and Infosys I do see narrowing of the valuation gap but I see a positive bias for valuation of both these companies. We are at a time where demand environment is improving and all of these companies would keep positively surprising on the earnings number. The EPS number for both TCS and Infosys have been on an upgrade cycle over the last several quarters which is likely to continue over the next two-three quarters as well.

I do see a valuation gap narrowing between TCS and Infosys though TCS valuation would sustain or inch up a little bit while Infosys would rerate.

When it comes to HCL Technologies, I see a rerating for HCL Technologies as well though I do not see a significant narrowing of valuation gap between TCS and HCL Tech. My view is HCL Tech valuation multiple would get capped closer to 15-16 times, they would not move beyond that on a 12 month forward earnings.

Q: What is your target price on TCS and which one do you think will outperform in 2014, will it be TCS or will it be Infosys?

A: My target price on TCS is Rs 2700 which we set yesterday. Between Infosys and TCS I don't see significant differential in the returns that investors would make in calendar 2014. We saw TCS doing significantly better than Infosys in the first half of the last calendar and Infosys doing a little better than TCS in the second half of the calendar.

However, when it comes to CY14, I think there would not be a significant differential in return. Both these stocks would deliver a return between 20-25 percent for the full year.