By Urvashi Valecha
Shares of Infosys rose 28.3% in just a month, and this rally has narrowed the valuation gap between Infosys and its larger peer TCS. Infosys is now trading at a one-year forward price earnings (PE) multiple of 21.4 times. This is at 21% discount to Tata Consultancy Services (TCS).
Infosys rallied after the company announced its results and the valuations of the company are inching closer to that of TCS, which trades at a forward earnings multiple of 25.9 times. The valuation difference of 21% currently between Infosys and TCS has declined from the premium of 33.3% that TCS commanded in 2019. The discount is currently closer to that seen in 2017. The valuation gap has been reducing for quite some time and according to market experts it is expected to reduce further. Apurva Prasad, institutional research analyst – IT, HDFC Securities said, “The near-term outperformance of Infosys has caused the discount of Infosys as compared to TCS to reduce and the valuation gap could go down to as much as 10% going ahead.”
Better than expected numbers of Infosys in the first quarter of the new fiscal were cheered by the stock markets. Infosys reported a sequential decline in revenue of 2% on a constant currency basis. Kotak Institutional Equities, in its report, stated that the reason for outperformance of Infosys in the current quarter could be due to the lower supply side impact of 0.2% of revenues and ramp up of strong new deals won in the fourth quarter of fiscal year 2020. The company’s portfolio of banking clients may not have cut spending, better execution Bocoran situs slot gacor hari ini and market share gains along with exposure to high growth, hi-tech vertical accounts have also helped the company’s performance this quarter, according to a report by Kotak Institutional Equities.
Additionally, the software services major is also reaping benefits of the measures it undertook in the last two years. The company started ramping up its digital capabilities, moved towards automation, improved its operating structure – onshore and offshore, localisation, coupled with large deal renewals have helped the company perform better over a period of time. “In the last two years, Infosys started investing in localisation, which has started to help the company now. Additionally large deal renewals in addition to the largest ever deal with Vanguard, largely stable accounts, improved operational rigour due to improved operating structure – onshore and offshore, automation among others has helped Infosys perform better,” said Apurva Prasad.
On the other hand, TCS’ performance was poor in comparison to Infosys and missed the Street’s estimates. Another analyst at a domestic brokerage said, “Infosys has delivered good growth over the last few years except in FY 19 Sbobet88 when TCS reported double digit growth, but when it comes to margin management, TCS fares better.”
Most market experts and brokerages have raised the target price of Infosys, even though the stock has had a decent rally in the view that there is more potential going ahead. “We raise FY2021-23E EPS by 7-8% and raise our Fair Value to Rs 950, valuing the stock at 20 times (~18 times earlier) June 2022E earnings. Buy stays,” said Kotak Institutional Equities in its report.
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