TCS vs Infosys: Which is better bet on Dalal Street? This is what Q4 result could mean for investors

The share price of Tata Consultancy Service (TCS) rose by nearly 4% on Dalal Street, after touching an intraday high of Rs 2,085.60 per piece on Sensex. Investors continued to have a buying sentiment on TCS, as at around 1017 hours, the shares were trading at Rs 2064.30 per piece up by Rs 50.55 or 2.51% on Sensex. Investors' bullish behavior can be attributed to TCS once again posting better than expected earning in Q4FY19. Interestingly, TCS presented its Q4FY19 result on the same day as Infosys. Even though both TCS and Infosys have posted growth in their PAT levels, investors prefer the former's stock. Opposite TCS, share price of Infosys was trading at Rs 727.70 per piece down by Rs 20.15 or 2.69%. Infosys has plunged by nearly 5% in just few minutes of opening session on Sensex. 

In Q4FY19, TCS' profit came in at Rs 8,126 crore up by 17.7% on yearly basis. Revenue was at Rs 38,010 crore higher by 18.5% yoy. However, operating margin stood at 25.1% down by 31 basis points yoy. Rajesh Goplnathan, Chief Executive OffIcer and Managing Director, said: "Thls is the strongest revenue growth that we have had in the last fifteen quarters. Our order book is bigger than in the prior three quarters, and the deal pipeline Is also robust. Despite macro uncertainties ahead, our strong exit positions us very well for the new fiscal."

On TCS, experts have given buy rating, while on Infosys many have downgraded their outlook. In fact, TCS shares are seen to rise by nearly 17% further. 

 Apurva Prasad, Amit Chandra and Akshay Ramnani analysts at HDFC Securities said, "TCS’ growth and scale leadership in digital (USD 6.7bn annualized) are key differentiators. Continuity in strong deal wins, broad-based growth across verticals (esp. core) and geographies are driving double-digit growth. Margin/attrition differential vs. peerset reflects superior execution. Payout policy (80-100% of FCF), 90% FCF/PAT, ~4% FCF yield and 11/10% USD rev/EPS CAGR over FY19-21E support valuations (currently at 20x FY21E). Risks to our thesis include macro slowdown in NorthAm/Europe and INR appreciation."

The trio hence said, "We maintain BUY on TCS following an inline 4QFY19. Our TP is Rs 2,410 implying 24x FY21E EPS, with ~1% change in est. TCS is our top large cap IT pick.'

Meanwhile, expert from Phillip Capital said, "TCS reported strong set of numbers this quarter, with revenue growth and margin performance beating expectations. Its digital business (31% of revenue), now at whopping ~$6bn continued to report strong growth of 46% yoy. While the company reported all round growth (double digit growth in all verticals), the biggest surprise was double digit (11.6%) growth in BFSI – which had been its only weak area YTD. Europe continued to dominate, with +17.6% yoy growth – twelfth consecutive quarter of double-digit growth. All these, place the company on a strong pedestal to be the fastest growing large-cap, despite it having the largest base."

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On TCS stocks, Phillip added, "While valuations (at 20x FY21 PE) might appear expensive – we view TCS belonging to the category of stocks like HUL, Maruti and HDFC Bank – market leaders in their respective domains, who command a significant premium over peers, by virtue of their market-leading positions (read our report here). TCS’ stock, while expensive, will keep getting more expensive as it continues to defy gravity. Maintain BUY." A target price of Rs 2,300 is set on TCS from Phillip. 

Going ahead, expert from Elara Capital said, "Given growth will likely be on par with Infosys and EBIT margin 370bp higher than that of Infosys as on 4QFY19, we reiterate TCS deserves a better premium than 11.1% implied from our estimates for both. We lower our revenue estimate by 0.9% for FY20 while increasing it by 0.2% for FY21E. We reduce our EBITDA margin by 92bp for FY20E and 54bp for FY21E, assuming higher SG&A investment we have seen in 4QFY19 to continue. We believe our margin estimates has upside if SG&A increase is due to trainee hiring. We reiterate Buy with a new TP of INR 2,410 from INR 2,400 at 21x (unchanged) FY21E P/E."

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Comparing Infosys and TCS, Phillip Capital explained that, overall, Infosys is sacrificing its margins significantly, and is still not able to match TCS on growth – which the latter appears to be doing it easily, without compromising profitability, on almost twice the base. We believe the growth (relative) and margin concerns will continue to haunt Infosys in near to medium term – leaving little room for upside.