India’s two largest IT majors,
Infosys and Tata Consultancy Services, announced their results last week with TCS reporting a 10.8 percent rise in net profit to Rs 8,131 crore, while Infosys' Q1 net profit beat estimates at Rs 3,802 crore.
Infosys increased its revenue guidance from 7.5-9.5 percent to 8.5-10 percent for the full year FY20.
TCS reported an operating margin of 24.2 percent (against 25.1 percent in Q4FY19) and its revenue from digital rose 42.1 percent year-on-year, which was 32.3 percent of the total revenue. Consolidated revenue stood at Rs 38,172 crore, up 11.4 percent YoY.
For Infosys, the operating margin also declined to 20.5 percent from 21.5 percent in Q4FY19. Consolidated revenue grew 14 percent to Rs 21,803 crore with digital revenue at 35.7 percent of total revenue. Digital revenue for the company registered a 41.9 percent growth on a YoY basis. Infosys also reported highest-ever large deal wins with total contract value at $ 2.7 billion.
While, TCS maintained its attrition rate at 11.5 percent, for Infosys, it stood at 23.4 percent, one of the highest rates.
Post the results, most global brokerages have revised their price targets for both these stocks. While Credit Suisse, CLSA, and Citi cut target price for TCS; HSBC and Citi increased TP for Infosys.
Here are the top brokerages' view on TCS and Infosys: Morgan Stanley
The brokerage has an ‘equal-weight’ call on both the stocks, with a target price of Rs 1,980 for TCS and Rs 700 per share for Infosys.
For TCS, The brokerage believes that the key for Q2 is achieving management’s goal of sustaining double-digit constant currency growth in FY20 and sees downside risks to Street estimates.
Dollar-revenue and constant currency revenue growth of Infosys are in line with its estimates and expects the company to complete the buyback process by early August 2019.
The brokerage maintained its ‘neutral’ rating on TCS, but cut the target price to Rs 2,000 from Rs 2,130 earlier. It has an ‘underperform’ rating on Infosys with a target at Rs 670 per share.
It expects TCS to miss 26-18 percent margin bank this year again.
For Infosys, it said that there was some favourable impact from wage hike deferrals into Q2.
The brokerage maintains a ‘hold’ rating for both TCS and Infosys with a target at Rs 1,900 per share for TCS. It raised Infosys’ TP to Rs 780 per share from Rs 760 earlier.
For TCS, growth slowed in Q1, despite strong deal wins, due to a cyclical slowdown, but its long-term outlook remains positive. Significant macro slowdown and the rupee appreciation are key downside risks for the company.
The raised guidance for Infosys offset the cyclical slowdown and is driven by deal wins, the brokerage said, adding that near-term margin is at risk as large deals ramp up. Guidance revision alludes the company’s confidence in its pipeline and large deal wins, it said.
The brokerage has a ‘sell’ call on TCS and slashed its target to Rs 1,970 from Rs 1,980 earlier. While it upgraded Infosys to ‘buy’ and raised its target price to Rs 820 from Rs 785 earlier.
EBIT remains below expectations for TCS and marginal aspiration of 26-28 percent looks difficult, the brokerage said.
EBIT is in-line for Infosys and deal wins and increases in revenue guidance are positive for the stock. The brokerage added that the stock is likely to be re-rated soon and the discount to TCS will narrow. Its a preference over TCS remains unchanged, it said.
The brokerage maintained a ‘buy’ call on both the stock but reduced price target of TCS to Rs 2,570 from Rs 2,650 earlier. For Infosys, its TP is Rs 900.
Q1 revenue and margins are a miss for TCS but deal wins and the outlook remains strong. Margin fell in Q1 on higher contracting costs and wage hikes. The brokerage cut its EPS by 3 percent for the stock.
FY20 revenue guidance for Infosys was raised due to strong contracting and deal conversion. It regained cost control after five quarters of unchecked margin slippage, CLSA added. Accelerating revenue growth, margin recovery and increased pay-outs keep the stock attractive. The brokerage sees the potential for upside surprised in FY21.
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