Can we see Infy push higher and close in on the valuation differential with TCS?
Numbers have been pretty strong quarter on quarter — 4.8% on a constant currency. The upgrade in the guidance is something that the market would definitely like and of course the margin has been a bit of a pain point given the increase in the salary and expenses. As for valuation gap, both TCS and Infosys are quoting at almost similar valuations on a one-year forward basis.
In the last two quarters Infosys has done a major catch-up vis-à-vis its valuations with TCS. These large cap companies are quoting at almost about 24-25 times one year forward and that is not something that we have seen in the past about five to seven years. The upside would necessarily come from the rolling forward of the earnings and to some extent through the buybacks. Given that the stocks have already run up, particularly the large cap ones, there may not be a significant rerating purely on the basis of these numbers and the guidance because the market was expecting some sort of an upgrade. The actual upgrade in the guidance for Infosys is slightly higher but from a long-term perspective, Infosys should remain in the portfolio as a core holding.
The outperformance between TCS and Infosys is clearly in favour of Infosys. Do you think down the ladder stocks will outperform the leaders– that is Wipro will outperform Infosys and HCL Tech outperform Wipro?
In the last six months, outperformance has actually come from players like MindTree, Mphasis, Cyient and L&T Technologies. Though these companies are quoting at much higher valuations, they continue to outperform and they continue to report much better numbers versus the largecap stocks. The question is within the largecap names like TCS, Infosys and HCL Tech, which one would do better given that the valuations are still not looking that much out of whack?
We reckon that Infosys at 24-25 times is quoting at much higher valuations than its historic average. The brokerages have not upgraded their earnings estimates for next year despite the guidance uptick. So we think that only buyback to some extent will support. There may not be a big rerating as such for the largecap names. We should focus on the midcap IT names like Mphasis, MindTree and to some extent L&T Technology, Cyient and Zensar.
How does Mindtree stack up within midcap IT?
The performances of some of these IT midcaps have been far better at 8%. For L&T Technology, the growth has been much higher than the market expectations and what is coming out from the conference calls is that the outlook is even better going into the next one year. The midcap IT companies have justified their outperformance vis-à-vis names like TCS, Infosys, and HCL Tech and one should really focus upon names like L&T Technology, Mphasis, Zensar, and Cyient.
We have a positive view on the four midcap IT companies where we think there is a case of rerating. If you see the last five years, between June 15 and July 15, IT stocks tend to do much better and that has been the historic trend. So, we should remain a bit selective on IT because a large part of the positives are known and instead focus on companies which have an additional delta in terms of positive surprises.
Coming to the EV policy which has been announced by the Maharashtra government, who would be the key beneficiaries here?
We have to keep in mind that TVS is the company which has a much higher exposure to the scooter segment, almost about 40%. If there is some sort of a disruption because of the vehicles being offered by companies like
or Bajaj Auto, then TVS could be at the receiving end and companies like Greaves Cotton and Bajaj Auto could derive some benefit out of it.
We have to bear in mind that this is only for Maharashtra, it is not a pan India thing. But this is something that could have long-term implications once you have other states also follow up with a similar kind of incentive scheme and we would have to see which commodities are able to benefit, apart from Greaves Cotton at this point of time.
