Infosys may be ahead of TCS on stock performance: Envision

Infosys looks to have an upperhand right now over TCS, says Nilesh Shah of Envision Capital.  The Vishal Sikka-led company has entered a period of price outperformance after several years, said Shah. Its stock will most likely have an edge over TCS, he added. On Friday the IT software major’s fourth quarter profit and operating profit beat analysts' expectations while revenue matched estimates. The market will have its sights on the company’s vision for 2020 — kudos for the company in having got half way down that road. The company plans to move from a 20 percent bench strength to 0 percent, says Shah. Bench strength refers to the competence and number of employees who are available to fill vacant positions in an IT company.Infosys' push in areas of automation and virtual reality may make it less reliant on US work visas.  If the company is trading at higher PE multiples, it is well-deserved, says Shah. Some analysts say the stock would start trading at 20 times expected FY18 earnings, compared to 19 times for TCS.

In the wake of the above-normal monsoon forecast by the IMD, the agri space, which has been an underperfomer so far, will do well. Demand will materialise over the next one year or so. The government goal to double farmers income by 2020 will be a shot in the arm for the sector.Below is the verbatim transcript of Nilesh Shah's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: 10 percent up on Infosys, would you give it that much if not today at least in the near-term?A: It looks like. I think from purely on impact point of view, clearly the results and the guidance have been very impactful. It deserves that 10 percent upmove that we have seen.Going forward, there seems to be a room for a lot more. Clearly, we believe that Infosys has just probably entered a period of outperformance after many quarters or maybe after several years and that is something which I believe will continue to happen that going forward, while one eye of the street is going to be on what Infosys does for a quarter or for a year but on the other hand, the market will continue to watch how well it move towards its aspiration of 2020. These are the two variables which perhaps after a very long time, the street is going to watch out for in terms of Infosys.So it is going to be -- on one hand a short-term medium-term kind of a monitoring which will happen but at the same time, the monitoring even from a long-term perspective which will continue for Infosys.Sonia: When you say a lot more, what do you mean because now it has been four quarters of a performance so there is that fresh wave of confidence that has returned back to the management? It has assumed its bellwether status again and an analyst earlier was telling us that it currently trades at 20 times FY18, do you get a sense that purely because of the non-quantitative factors, the confidence, the fact that it has beaten its revenue guidance after four years, does it deserve to trade at much higher multiples?A: At this stage, it looks like so. T he case for a higher P/E multiple is clearly there and it is again not about what it does for one quarter or one year but clearly there is a huge transformation process which is going on at Infosys.If you clearly, see the kind of initiatives which the new leadership is taking to transform this company from that conventional application development maintenance job to getting into high value added product offerings, that transformation is something which is probably not seen so far and that could be a huge positive surprise.Clearly if you look at those three objectives or aspirations that they have for 2020 and the kind of business strategy, which they are articulating at this stage, if you were to combine the two, that clearly makes the case for a higher P/E rerating of Infosys.Sonia: The other big theme that the market has played all of last week was the monsoon prognosis. We have seen many of these tractor makers, these rural plays in fast-moving consumer goods (FMCG) grow quite a bit, any of those themes that you would like to play for the next two-three months?A: I don’t know about the next two-three months but clearly the agri and the rural space has clearly been an underperformer for the last two years be it the equipment manufacturers, the tractor manufacturers, the agro-input providers be it the seed companies or the fertiliser companies, I think clearly apart from consumer durables or the appliance makers over the last couple of years, barring that segment, everything else has been virtually gross underperformer and clearly with a forecast of an above normal monsoon and -- I was reading somewhere and I am not sure if that is right but this above normal forecast is just coming in after 15 years, what I read was that last time the Indian Meteorological Department (IMD) came out with such a forecast was 1999. So you are clearly seeing that after 16-17 years, the IMD is stepping out and saying it is going to be an above normal rainfall which bodes well.So you see that demand perhaps which has not happened over the last two years will materialise over the next one year or so maybe closer to this season. So I clearly believe that that is one area to focus on.Two is whatever initiatives this government has been announcing over the last many months particularly in the Budget, clearly bodes well for the sector.Third is of course again the aspiration that by 2022 the government's objective is to double farm incomes. That is a paradigm shift in terms of the thought process and if all these three things turn favourably, a lot of plays in the agri and rural space are likely to do well and deliver good returns over a medium-term to long-term horizon.Latha: How would you evaluate TCS now? Do you see money going from TCS to Infosys or do you think TCS will be left alone? As a performer it is now beginning to underperform Infosys.A: I think clearly over the next few quarters, this trend may continue in terms of TCS underperforming relative to Infosys. This is clearly a kind of a phenomenon I have seen consistently happening over the last 10-15 years that every three-four years, there is change of in a way leadership from a market outperformance point of view. At some point of time it is Infosys and it does it for three-four years then comes in TCS, which again does it for three-five years then comes in TCS, which again does it for three-five years and then some point of time, it is Wipro or HCL Technologies. That is clearly the way it keeps on happening. It is not as simple as that.However, right now, Infosys has got a lot of things going right for itself. There is change of leadership, there is a breath of fresh air. If you see what Vishal Sikka has been speaking in the media over the last two-three days, clearly saying that when he joined in, there was anxiety, today there is excitement. That itself is a huge thing.Attrition levels are lower, two-three very tangible kind of targets that he has, one is to kind of move from a 20 percent bench towards zero percent bench. That is again a huge, when you have close to 200,000 employees and 20 percent which means 40,000 employees, you are going to basically be able to build them or they get productive, I think the impact of that on margins and per employee revenue is phenomenal.He is talking of again using things like automation and virtual reality to get Infosys into a visa independent company, which means you don’t depend on number of visas, visa cost for the US Congress does and things of that kind and then of course be able to adopt a lot of the new things to provide more value for customers.If you look at all of this and then of course dovetail it into the 2020 kind of aspiration it has, it has a lot of tailwinds going for itself. So to that extent -- I don’t know whether TCS will yet be able to articulate a strategy like this. Maybe it does but maybe that is something probably still a few quarters away and I think till that point of time, clearly, it is Infosys from a stock price performance which perhaps will have the upper hand in the market place.Sonia: What is your overall view on the market? We have just started this uptrend, we are back at 7,900 on the index. Over the next three-six months do you think there is more to go?A: I think we probably get into more a consolidation phase. I don’t think the earnings growth is going to be so substantial at the aggregate level, there could be individual companies, individual sectors which could do very well but I think on a very aggregate basis, it is unlikely that at least for the next two quarters we will get into double digit growth. We will probably be in mid-single digit, maybe high-single digit but definitely not getting into double digit growth, which in that case overall markets it is hard to see rerating going ahead from here.I think between April and June, you could also see a lot of negative news coming in yet from the banking space, the asset quality concerns and all of that. So, I clearly believe that the case for a strong upside from current levels over the next few months it is not very strong. We are going to see some bit of consolidation, we saw the markets bouncing back from oversold zone in February-March and that is where it is.Additionally, I think the global macro don’t seem to be in great shape. I think the kind of growth numbers that we are seeing from China, you are seeing International Monetary Fund (IMF) continuously lowering their growth forecast, every time they come up with the forecast, the global growth is lower by some 20 bps or something like that. Every time it keeps going down. So that is clearly some area of concern.So clearly, from a very short-term perspective levels about 8,000 are unlikely to sustain itself and you would probably remain in this range of 7,000-8,000. It is good if it consolidates here, I think that will build a very strong base for this market to start performing from H2 onwards.Latha: For investors who have missed the bus on Infosys, you go ahead and buy even at current levels, this is a long-term winner?A: It looks like. In the short-term of course everything seems to be going right for it and clearly the big lesson over the year has been that when a company gets into industry leading growth rates and is able to demonstrate on other parameters like capital efficiency margins and all of that then I don’t think it makes too much of sense to worry about P/E multiples or how the recent price outperformance has been. It is important that you get on to it and ride it in the short-term. I think in the long-term 2020 is an important goalpost, that should be an important kind of a parameter that investors need to keep looking at and assuming for a moment that it does achieve that or even it gets close to that then that also suggests a strong upside from even 4-5 year perspective. So, whichever way you look at it right now, Infosys is a good investment to look at._PAGEBREAK_

Latha: Somebody was telling us 20 percent gains in one year, possible?

A: It is quite possible because if you look at a year from now, we would again be talking of FY18 and if they do meet their guidance this year of 13 percent revenue growth and next year even if they maintain it or even get a little better and then a lot of productivity linked gain starts coming in.