Infosys: MFs shift some weight from TCS to Infosys as valuations turn attractive

Infosys and TCS are must-have stocks for all bulgebracket money managers shopping in India, but the balance appears to be tilting of late in the former’s favour. Incremental fund allocations are moving to the more reasonably valued Infosys, say analysts, citing a raft of conventional valuation metrics.

In the past eight trading sessions, Infosys shares gained 11 per cent while TCS shares declined half a percent. An average Rs 620 crore worth of Infosys shares were delivered during this period, compared with Rs 480 crore for TCS.

“After the recent correction, the Infosys stock trades at attractive valuations and is a must have in the portfolio,” said Kawaljeet Saluja, analyst, Kotak Securities. “We like the success of turnaround initiatives as captured in accelerating growth in digital revenues and mindshare with the ecosystem and large deal wins.”

The Infosys stock is currently trading at 17 times FY21 estimated earnings and offers a dividend yield of 3.2 per cent. TCS is trading at 23 times FY2021 estimated earnings, offering yield of 1.4 per cent.

Infosys fell over 16 per cent on 22 October after CEO Salil Parekh and CFO Nilanjan Roy were accused of ‘unethical practices’ by a whistleblower group of employees. Most brokerages then recommended shifting their investments from Infosys to TCS as the allegations could have led to a lot of potential uncertainty for the company and could put the stock under pressure.

“The knee-jerk correction in the stock price implies it now trades at a mouth-watering 16.5x FY20E EPS, thereby widening its discount to TCS (with a similar growth profile) to 35 per cent from 19 per cent,” said Sandip Agarwal, analyst, Edelweiss. “We are increasing Infosys’ weighting in our model portfolio from 15 per cent earlier to 27 per cent.”

In the September quarter, Infosys’ margins improved 120 bps sequentially, while TCS’ fell to a ninequarter low. TCS missed estimates due to a weak performance of the retail segment, besides the expected slowdown in financial services and manufacturing.

“No prima facie evidence to corroborate the allegations of whistle-blowers, the management’s proactive attention to the complaints, and confidence in the company’s numbers and corporate governance give investors the necessary investment comfort,” said Sanjeev Hota, head of research at Sharekhan. “Although we await the outcome from the independent investigator on the case, we believe that the business would not be impacted owing to these distractions.”

The Infosys chairman has defended the sequence of actions taken in the aftermath of the allegations, highlighting the company’s strong governance systems.

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