“We expect a negative reaction on the (Infosys) stock in the near term, and expect the company’s valuation discount could widen against TCS till clarity emerges on this issue,” said UBS’ Diviya Nagarajan in a note, maintaining a ‘neutral’ rating on the stock.
Infosys shares ended down 16.2 per cent at Rs 643.3 on Tuesday resulting in the BSE Information Technology Index declining 7 per cent. TCS shares gave up initial gains to end down 0.3 per cent at Rs 2051.6.
Infosys’ valuations had been closing the gap with TCS over the last few months as the Bengalurubased company’s prospects have improved following the appointment of the new management.
Infosys’ trailing Price to Earnings (PE) ratio stood at 22 times and TCS traded at 24.4 times on September 30. This has widened now, with Infosys trading at a PE of 17.7 and TCS trading at 23.8 times. A widening PE ratio means investors are more comfortable putting money in TCS over Infosys “TCS will be preferred in the near term as it is the bellwether. Nothing has been proved yet, but allegations against Infosys are quite serious,” said Harit Shah, IT analyst at Reliance Securities. “Until the issue blows over, the stock will be weak but one can consider buying at Rs 600-620 level,” said Shah.
Till Friday, Infosys’ shares were up 16.3 per cent for the calendar year 2019 compared to 8.65 per cent gain in TCS, on the hope that steady management structure will help the company log better earnings performance. Infosys’ revenue grew 3.3 per cent sequentially in the September quarter, double that of TCS’ 1.6 per cent.
Infosys’ valuations have suffered in the past due to a protracted stand-off between the founders and the board.
The founders had raised issues related to corporate governance, high salaries to top executives, large severance package to ex-CFO Rajiv Bansal and costly acquisition of Panaya — all of which ended in the resignation of then CEO Vishal Sikka in August that year.
The company’s shares rose just 2.3 per cent in 2017 compared to 10.8 per cent gain in the BSE IT index during the same period.
The benefit of the allegations is likely to flow to TCS, analysts said.
“The valuation discount of Infosys to TCS could widen a little more from here, till there is clarity on this issue. TCS has historically traded at a premium because of better business model, size, higher margins and governance; though this premium narrowed post July 2019.
Infosys can fall some more, say 5-7 per cent, but aggressive selling is likely to stop after that because at that point, the valuation difference to TCS would be too big for comfort,” said Deepak Jasani, head of retail research at HDFC Securities.
However, more weakness is in store if the allegations are proven true. “Infosys is arguably one of the most over-owned stocks, both in foreign and domestic portfolios. If the allegations are proven true, then it could see worse selling,” said Sanjiv Bhasin, executive vicepresident, market and corporate affairs at IIFL.
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