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    We will see slightly better growth at Infosys than at TCS in near term: Sumeet Jain

    Synopsis

    So, I guess it is a wait and watch mode as of now. But if you talk about digital transformation and the cloud migration tailwinds, that are pretty much intact.

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    But yes, if it is 4 to 6, then yes, the Street estimates will get cut by around 2-3% and sentimentally it will be more negative. So, we could see maybe a 5% kind of a correction in the stock on the back of it if the guidance comes in at around 4% to 6%.
    "There has been a right shifting of demand in terms of the next future quarters and this is where we believe the overall structural demand drivers for the sector in terms of cloud migration and digitalisation remain largely intact," says Sumeet Jain, ICICI Securities.

    Do you think that this time around the kind of commentary especially that came about really does not give much clarity as to whether or not the worst is over, what the future quarters could possibly bring and that is going to be a bit of an overhang or a concern for investors in TCS?
    Yes, it was a mixed sort of a commentary from TCS. I mean they clearly mentioned that retail high tech and BFSI in US and Europe continues to remain weak, but on the top of that they also mentioned that the overall order pipeline is still pretty good.

    So, there has been a right shifting of demand in terms of the next future quarters and this is where we believe the overall structural demand drivers for the sector in terms of cloud migration and digitalisation remain largely intact.

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    But yes, I think in the near term there are challenges, who knows US might be going through a recession in terms of 30-35% probability assigned by the global analysts, so yes, there is a bit of a risk in terms of the near term outlook and this is where TCS management has been a bit cautious in terms of giving a clear mandate that we are out of the woods and going forward you will see a start seeing a strong growth in the coming quarters.

    So, I guess it is a wait and watch mode as of now. But if you talk about digital transformation and the cloud migration tailwinds, that are pretty much intact. So, we are quite positive on the space from medium to longer term perspective where we believe there is a right shifting of demand happening where next one to two quarters might be a bit weak.
    So, for TCS, we are expecting a 0.5% to 1% kind of a sequential growth in June because there has been a delay in terms of conversion of pipeline to order book and then order book to revenues.

    But then, from post June quarter we believe the growth should revive back not very strongly but in a gradual way where we are expecting a 2-2.5% kind of a sequential growth in the remaining nine months of FY24 which will lead to overall 7% kind of a growth for TCS in the year FY24. So that is our expectations with certain margin expansion for the year given that the supply side headwinds are largely behind and the attrition is cooling off.

    So, yes, near term could be a bit challenging and as far as the multiples are concerned TCS last five-year average, historical one year forward multiple is around 25 times; it is trading at around 25 times FY24 and almost 22 times FY25. So, we believe given that the structural demand drivers are intact, these stocks can trade at last five year average multiples and the earning growth of high single digit to low teens will drive the stock price returns. So, yes, that is our view on the stock.

    Do a comparison for us with respect to how the stock prices you believe are likely to trend for Infosys versus TCS.
    We have a higher upside on Infosys, almost 28-29% upside now and the reason for that is in the last couple of quarters the discount at which Infosys is trading at TCS has widened a bit primarily because of the margin concerns in Infosys where some of their recent deals like Daimler have diluted the margin because of the integrated nature of the deals and this is where we believe that in the second or third year of these deals, typically the margins expand and this is where the earning growth of Infy can outperform TCS in the near to medium term.

    So, this is where we have a higher upside on Infosys, but we have buy rating on both the names. And other than that if you look at the first half seasonality in any given year, then Infosys QoQ growth in the first half of any financial year is better than TCS. So, from that perspective, in the near term quarter we will see a slightly better growth at Infy than at TCS. So, primarily these two reasons we are more positive on Infy.

    You are saying today Infosys will report better numbers than TCS?
    Not really. Actually, we are expecting them to report around 0.1% QoQ growth in CC terms which will enable them to end up the full year at 16.4% which is obviously at the higher end of their guidance. And given that TCS reported around 0.6% CC growth, where on our seasonality basis typically December and March quarters are pretty weak for Infosys compared to TCS.

    So, yes, we do not expect a very strong growth numbers from Infosys as far as this quarter is concerned, but yes in terms of guidance we are expecting them to give a guidance of 6% to 8% in constant currency terms for FY24 and in terms of EBIT margins around 21% to 23% and the confidence that we are having in six to eight is primarily because of the guidance of 8% to 10% what Accenture has given for the year ending August 23.

    I guess despite all the banking crisis and the events we have seen with Silicon Valley Bank, Signature and Silvergate and then with Credit Suisse and UBS despite that the technology demand environment has not derailed. Yes, there has been a postponement of discretionary projects, but overall demand environment has not derailed, so it is more like a right shifting of demand than the complete cancellation.

    For Infosys, do you think there is bigger room on the downside as well because the Street was pencilling a lot more if the guidance comes in at a range which is, let us say, 5% to 6%. Does that leave room for a bigger disappointment and bigger EPS cuts on Infosys?
    Not really, actually. I mean, typically they give a guidance of 2% to 3% points range. And in the past, like, we have never seen them giving a very narrow range like what you mentioned. And given the demand environment what Accenture is seeing or generally the other global tech agencies like Gartner is seeing and even for that matter if we look at the order book of TCS, it was not that weak in the overall scheme of things. So, I guess even if they start at 5 to 7, Street is largely at around 8-9% if I am not wrong for FY24.

    And typically, Infosys management has been known to start the guidance in a very conservative way and then increase it as they go through the year. So, starting at 5 to 7 will not lead to major top line growth cuts on the Street in my view.

    But yes, if it is 4 to 6, then yes, the Street estimates will get cut by around 2-3% and sentimentally it will be more negative. So, we could see maybe a 5% kind of a correction in the stock on the back of it if the guidance comes in at around 4% to 6%.




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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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