Thematic Report - Switch from Infosys to TCS - Sharekhan

Key points

In the uncertain demand environment for the Indian IT services companies, it is advisable to stick to the leader Tata Consultancy Services (TCS) which is our preferred stock among the frontline IT companies. TCS is likely to sustain its much superior track record in terms of revenue growth and margin stability in the coming quarters.

On the other hand, Infosys is facing transition issues (management change) and the management offers weak commentary on the demand outlook. Industry surveys also indicate that Infosys' top clients are likely to cut back on IT spending, spearheaded by British Telecom (BT), its single largest client. In comparison, the survey indicates a 23% increase in IT spend by TCS' clients. Moreover, according to media reports, Infosys' management has undertaken desperate measures like working on some Saturdays to boost revenues in Q3.

In terms of valuations, TCS trades at a slight premium to Infosys. The relatively sharper run up in Infosys (as compared to TCS) has narrowed down its discount to TCS which could be utilised as an opportunity to switch from Infosys to TCS due to the latter's superior growth outlook. Currently, we have a Buy rating on TCS and Hold rating on Infosys.

Risk: The key risk to our call is the potential distortion in quarterly results due to cross currency fluctuations (especially Euro/USD and Pound/USD).

Source : Equity Bulls

Keywords