Infosys vs TCS: Which stock is a better bet at the current levels?

Infosys and Tata Consultancy Services announced their respective June quarter results for the financial year 2019 – 20 (Q1FY20) last week. While Infosys registered 5.26 per cent rise in its Q1FY20 net profit at Rs 3,802 crore, TCS saw an uptick of 10.74 per cent in its profit after tax (PAT) to Rs 8,153 crore.

An uptick in demand for its digital services, apart from a momentum in the large deal space, prompted the Infosys to raise its FY20 revenue guidance to 8.5-10 per cent from 7.5-9.5 per cent as guided earlier. The company now plans to return 85 per cent of the free cash flows (FCF) in the form of buybacks or dividends on a five-year cumulative basis (70 per cent earlier).

Post the results, most brokerages have revised their price targets for both these stocks. For TCS, The number of ‘buy’ ratings for the stock has reduced from 27 to 23, while ‘sell’ calls have increased from 7 to 9. The average 12-month price target has also seen a slight reduction. READ MORE HERE 

On Monday, Infosys reacted to the Q1FY20 results announced post market hours on Friday, with the stock rising over 7 per cent to close at Rs 779 levels on the National Stock Exchange (NSE).

Here's how brokerages have interpreted Infosys' results:

Nomura

We believe increased FY20F revenue growth guidance, strong deal win momentum and improved capital allocation policy are positive. Our target price of Rs 680 is based on 16.5x FY21F EPS of Rs 41.4. The stock is trading at around 17x FY21F EPS on consensus estimates. We prefer HCL Technologies in the IT services space. Material margin improvement and an improvement in the growth trajectory in BFSI/retail are key risks to our thesis.

Jefferies

Management indicated broad-based demand across verticals & geographies, helped by digital adoption and large transformation projects. In BFSI, challenges in select US banks due to M&A and in capital markets across Europe & US are being offset by strength in other segments, such as retail banking and cards & payments. European manufacturing and healthcare are relative weak spots. High attrition in Q1FY20 was partly attributed to seasonality and involuntary attrition.

We tweak our estimates slightly to factor in better revenue growth in FY20E but stronger INR. Our price target, based on 18x FY21E EPS, increases marginally to Rs 840 (from Rs 835). We maintain our Buy rating on the stock and it remains among our preferred picks in the sector, alongside TCS.

Edelweiss Securities

Margin pressure would largely ease off with the proportion of digital rising and deployment of trained resources leading to decline in sub-contracting costs, thereby paving the way for stronger-than-expected earnings growth in our view. 

We maintain Infosys as our top pick based on its: 1) unrelenting deal-win momentum— $2.7 billion in Q1FY20; 2) digital-focused strategy; and 3) undemanding valuation. We remain bullish on the IT sector in general, and root for Infosys as it leads the way. Maintain ‘BUY / sector outperformer’ rating with a revised target price of Rs 923 (Rs 880 earlier).

Antique Stock Broking

FY20 has started on a good note with revenue growth acceleration, revenue guidance raise and comfort on the margin outlook. As a consequence, we forecast YoY USD EBIT growth to recover sharply from -4.4 per cent YoY in 1QFY20 to double digit in 2HFY20. This is in sharp contrast to peer group which will likely have deceleration in revenue and EBIT growth in FY20. 

We have tweaked estimates marginally and increase the PE multiple to 20x given Q1 performance and outlook. Maintain BUY with a target price of Rs 850 (based on 20x FY21E EPS). Stock is trading at 18.8/17.1x FY20/FY21E EPS.

ICICI Securities

With worst in margins behind, raise in revenue guide and improved capital allocation, we maintain our ADD rating on Infosys with a target price of Rs785 based on 19x FY21E EPS. Sticky attrition is at odds with pick-up in growth especially in digital services and compensation interventions, but should moderate with higher onsite opportunities to help.

HEAD-TO-HEAD
TCS					Infosys
DESCRIPTION	Jun-19	Jun-18	Var%		Jun-19	Jun-18	Var%
Net Sales	38172.00	34261.00	11.42		21803.00	19128.00	13.98
PBIDT (Excl OI)	10037.00	9071.00	10.65		5152.00	4703.00	9.55
Other Income	1675.00	1225.00	36.73		736.00	726.00	1.38
Operating Profit	11712.00	10296.00	13.75		5888.00	5429.00	8.45
Profit After Tax	8153.00	7362.00	10.74		3802.00	3612.00	5.26
Net Profit (after Extrodinary Items)	8153.00	7362.00	10.74		3802.00	3612.00	5.26
Basic EPS before Extraordinary Items	21.67	19.17	13.04		8.83	8.31	6.26
PBIDTM% (Excl OI)	26.29	26.48	-0.69		23.63	24.59	-3.89
PBIDTM%	30.68	30.05	2.10		27.01	28.38	-4.85
PBDTM%	30.01	30.00	0.02		26.82	28.38	-5.50
PBTM%	27.87	28.56	-2.43		23.70	26.10	-9.21
PATM%	21.36	21.49	-0.60		17.44	18.88	-7.65
Source: ACE Equity; consolidated numbers; All figures in Rs crore