INSUBCONTINENT EXCLUSIVE:
NEW DELHI: Infosys valuation discount to TCS has climbed to a high of 27 per cent now
The last time when the discount was this high is in the first half of FY15.
The period in between was marked by mid-single digit growth for
Infosys compared with high teens for TCS
Motilal Oswal Securities believes that the performance of both the IT majors has been similar during FY16-18, warranting a catch-up for
Infosys valuations.
Valuation discount here can be described as the lower price an investor pays for Re 1 future earning (12 months) for
Infosys compared with that of TCS.
Shares of TCS have risen 37 per cent in the last one year against Infosys' 27 per cent
There are many counts where the two companies are showing similar fundamentals
The valuation differential last reached the bottom when the gap in performance was at its peak, and hence, justified in some ways
This time, however, recent financial performance and future expectations of growth cannot explain the same, which is manifested in multiple
figures, Motilal Oswal Securities said.
Infosys' top line growth in constant currency terms fell to 5.8 per cent in FY18, from 8.3 per cent
For TCS, constant currency revenue growth for the year stood at 6.7 per cent in FY18, down from 8 per cent in FY17.
In terms of Ebitda,
Infosys' figure at 27 per cent for FY18 was 60 basis points higher than TCS' 26.4 per cent
This is in contrast with a 300-basis point Ebitda gap Infosys had with TCS in FY14.
While TCS has been citing a stable pricing environment,
Infosys bottomed and reversed the trend in FY18, TCS continued the southward journey
Even in terms of payout, both turned magnanimous last fiscal, adding a healthy buyback to their strong dividend policy, the brokerage
said.
"We have been of the opinion that larger peers such as TCS, Accenture and Cognizant act as fair reference points for Infosys, whose
size, financial performance and capital allocation have been comparable
Hence, pending the stability of the organization under the new leadership, there remains a case for the convergence of the gap in valuations
We maintain our Buy rating," it said.
TCS' valuations, on the other hand, reasonably factor in the current momentum in the business, leaving
little room for relative outperformance
The brokerage has maintained a 'Neutral' rating on the stock.
