TCS may continue to enjoy 10% premium over Infosys: IIFL

As Infosys continues its run on the bourses for the second day after its third quarter results, experts have begun re-rating the stock. Speaking to CNBC-TV18, Aniruddha Mehta, Research Analyst at IIFL finds the stock fairly valued and sets a target of Rs 2850 per share. He pegs FY 14 EPS at Rs 177 per share.

Speaking about TCS, which is scheduled to announce its numbers later in day, Mehta said it may enjoy a 10% premium over Infosys. He expects TCS to report a 3 percent revenue growth in dollar terms in the third quarter. He also remains positive on Wipro.

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

Q: How much more you reckon for Infosys, it is at Rs 2,820 now, would you draw the line here?

A: Yes, we would draw a line over here. We have a target price of Rs 2,850, which is around 13.7 times FY15 earnings, which we feel is a pretty good valuation for the company. I would probably draw a line over here.

Q: With Rs 2,850, what kind of earnings per share (EPS) targets do you have for FY13 and FY14?

A: For FY13, we have EPS target of Rs 164 and FY14 of Rs 177.50.

Q: Do you see the entire valuation gap between Tata Consultancy Services (TCS) and Infosys closing out now, or do you think a 10 percent kind of valuation premium may yet be retained by TCS?

A: This valuation gap may yet be retained because results were not comprehensively strong enough for us to turn structurally positive on the company. A lot of the result was because of the discretionary projects ramping up strongly and also the strong growth in the products, which is a bit non-sticky in nature and it may not be continued for coming quarters.

Before turning positive on Infosys, we will wait for sustenance of this particular revenue momentum. We would expect a certain amount of discount to be there.

Q: What have you pencilled-in for Tata Consultancy Services (TCS) later today?

A: For TCS, we are expecting around 3 percent of dollar-revenue growth, which has about 2.7 or 2.8 percent of volumes. Some amount of cross-currency benefit would be there. On the operating margin front, we are expecting about 30 basis points (bps) of fall.

This is largely because of low volumes. It is impacting the utilisation. Also some fresh hiring, which will have an impact on the margins. On the profit after tax (PAT) front, we have about 2 percent of growth quarter-on-quarter (QoQ).

Q: Infosys has also raised expectations that Wipro will do a non-core on Friday, would you bet on it?

A: I would still wait for Wipro because large part of the growth that we have seen in Infosys is because of the strong growth of the deal-wins on the transformational side that is consulting system integration as well as the products. We cannot draw a like-to-like comparison with Wipro.

We continue to be positive on Wipro, on its improving performance and we expect the differential between the leader and Wipro, in terms of growth of revenues, as well as the valuation to narrow down gradually. It is one of our top picks right now.

Q: Volume growth for Infosys was about 2 percent this quarter, despite the huge reaction the stock has gotten. What is it that you expect volume growth to do over the next few quarters just to understand where you think Infosys is headed?

A: Basically we have pencilled-in a growth of around 10-11 percent for FY14, which is largely volume driven. We have taken a bit of pricing hit in the next couple of quarters where we expect the mix of portfolio to probably normalise post this quarter.

Largely we expect the volumes in FY14 to grow around 10-11 percent and for next quarter we are going with the guidance that the management has given.

Q: Does this have any ramifications for how the midcap IT space might perform next year as well because people were getting quite pessimistic after seeing what Hexaware Technologies had to say earlier. Do you think your clients may see midcap IT in a better light now?

A: As I said, a large part of the growth cannot be extrapolated. However, if you see the deal-wins that are happening on Infosys and the commentary in terms of higher cost efficiency spends being happening, this can be extrapolated to the midcap peers. We have certain midcaps in our coverage which we are positive on which include KPIT Cummins as well as Persistent Systems.

Q: Premium valuations were for TCS but the big beats were coming in from HCL Technologies, do you think they are going to do a repeat this quarter?

A: Largely what happens on HCL Technologies depends on their announcements of deal wins, which they will probably announce this quarter. That would be the key figure that the street would be watching. We would expect largely an in-line quarter from HCL Technologies and from valuation perspective; a large part of the growth is there in the price.

Q: The difficult call is to answer your client call today, if people have not owned Infosys and they are calling you this morning asking you what to do now, what will you tell them - you missed the bus or still buy at Rs 2,800?

A: I would rather wait for a couple of quarters before turning positive on the company. The other peer Wipro, which has relatively lower valuation but improving growth performance, the valuation gap, should reduce going forward. I would rather expect to invest in Wipro and wait for a better price level for Infosys.

Q: What is your price target on TCS at this point?

A: We have a target price of around Rs 1,350 for TCS.