Saturday, September 14, 2019

Infosys, TCS enjoy best prospects to deliver growth outperformance


Overall our price targets for 5 top-tier companies rise by 2-10%, as a result of the changes.
Infosys best placed near-term, on both growth & margin.

Our recent meetings with Infosys & Wipro and channel checks suggest a mixed picture with rising risks in BFSI but continued overall deal momentum for select companies. Benefit of recent INR-USD depreciation will be offset to some extent by cross ccy headwinds. We expect continued divergent growth across companies with Infosys best placed in the near term. Amidst our positive stance towards IT services as a relative defensive, TCS & TechM are our other Buys.

Infosys best placed near-term, on both growth & margin

We maintain near-term visibility is best for Infosys amongst top-tier companies given its strong deal win momentum. We expect revenue growth for FY20e to surprise positively at 11.5% y-o-y constant ccy vs. its latest guidance of 8.5-10%. This implies 11% y-o-y growth for rest of FY20e. Despite visible margin pressures across companies in Q1, we also expect Infosys’ FY20e Ebit margin to meet the mid-point of its guided range at 22%, implying 22.5% for rest of FY20e.


Adjusting estimates, PT for ccy & other factors

We adjust our estimates to factor in weaker INR vs. USD but stronger cross currency headwinds. We temper our growth expectations for FY20e in some cases to reflect rising macro risks. We also introduce FY22e estimates and roll forward our price targets. We raise valuation multiple for Infosys as we expect its discount to TCS to narrow. Overall our price targets for 5 top-tier companies rise by 2-10%, as a result of the changes.

Infosys, TCS remain preferred picks

We maintain our positive stance on Indian IT services as a relative defensive. TCS & Infosys remain our preferred picks as we believe these are best placed to deliver growth outperformance, which should also drive better margin defence. We believe risk-reward is favourable for Tech Mahindra given improving communications outlook – recent large AT&T deal will add. Despite its recent deal win momentum, we maintain Hold on HCL Tech given risks from high inorganic contribution. Maintain U/P on Wipro given consistent growth underperformance.

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