MOSL: INFOSYS (Buy)-Historical high valuation gap vis-Ã -vis TCS unwarranted
Infosys: Historical high valuation gap vis-à-vis TCS unwarranted; Case for a narrowing of the gap; Buy
(INFO IN, Mkt Cap USD39.4b, CMP INR1215, TP INR1400, 15% Upside, Buy)
- There has been little to choose from between the financial performance of INFO and TCS over the three-year period, FY16-18. Yet, INFO's valuation discount to TCS at ~25% is at a historical high. The last time the discount was as high was in 1HFY15, when INFO's growth lingered in mid-single digits compared to high teens for TCS.
- A revisit to the fundamental reverse DCF leaves us with an implied perennial growth gap of 5pp and FCF conversion gap of 4pp (as a % of revenue) - we note that the former is not the case even at present. Add to that the revenue growth guidance for FY19, currency tailwind to earnings, and yet another year of a healthy payout - we see enough in INFO for the gap to narrow.
- We have been of the opinion that larger peers such as TCS, Accenture and CTSH act as fair reference points for INFO, whose size, financial performance and capital allocation have been comparable. Hence, pending the stability of the organization under the new leadership, there remains a case for the convergence of the gap in valuations. We maintain our Buy rating.
- TCS' valuations, on the other hand, reasonably factor the current momentum in the business, leaving little room for relative outperformance. We maintain our Neutral rating.
Infosys is a global technology services company based in India. Co. provides business consulting, technology, engineering and outsourcing services. Co.'s end-to-end business solutions include: Consulting and Systems Integration - consulting, enterprise solutions, systems integration and advanced technologies; Business IT Services - application development and maintenance, independent validation services, infrastructure management, engineering services comprising product engineering and life cycle solutions and business process management; and Products, business platforms and solutions, including Finacle™, which addresses core banking, mobile banking and e-banking needs of banks worldwide.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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