TCS likely to open higher today, Infy may correct on Q4 numbers

Most brokerages cut their target prices on Infosys by as much as 17 per cent.

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Strong growth in revenue from banking and financial services boosted TCS’ performance, which helped the company post its best show in 15 quarters.
MUMBAI: Tata Consultancy Services (TCS) shares are expected to open strong on Monday on betterthan-expected fourth quarter earnings. Rival Infosys, which guided for lower profits in FY20, could drop, mirroring the 4 per cent fall in its American Depository Receipts (ADRs) on Friday.

Both companies announced their results after trading hours on Friday. Most brokerages cut their target prices on Infosys by as much as 17 per cent, while some downgraded it. Analysts mostly retained ratings and target price for TCS.

“Infosys will correct at opening and TCS may open positive,” said Sanjiv Bhasin, executive VP-markets and corporate affairs at IIFL. “But the gains (for TCS) are likely to get sold into. Both the stocks are fully priced in at the current levels. The rupee is now a headwind and Europe business is looking weak,” he said.


Strong growth in revenue from banking and financial services boosted TCS’ performance, which helped the company post its best show in 15 quarters. Profits grew 17.7 per cent to Rs 8,126 crore in the fourthquarter on revenues of Rs 38,010 crore, which expanded 18.5 per cent.

Infosys forecast lower-than-expected growth at 7.5-9.5 per cent for FY20 and slashed margin expectations to 21-23 per cent. Its fourth-quarter profits increased 10.4 per cent to Rs 4,074 crore and revenue by 19.1 per cent to Rs 21,539 crore.

“There may be a mild disappointment in case of Infosys results because of the guidance cut,” said Deepak Jasani, head of research at HDFC Securities. “TCS has beaten expectations, but even here we may witness a sell on news scenario as well," said Jasani.
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BROKERAGES ON INFOSYS
Centrum has downgraded the stock to ‘add’ from ‘buy’ and cut target price by 3.8 per cent to Rs 775. Dolat Capital cut rating to ‘sell’ from ‘buy’ and reduced target price by 16.7 per cent to Rs 700. HDFC Securities downgraded the stock to ‘neutral’ from a ‘buy’ and lowered target price by 6 per cent to Rs 755.

“Results disappointed on margins and the outlook guidance was weaker on both growth/margins. We expect the stock to react negatively to the results. HCL Tech is our preferred pick in Indian IT,” said Nomura, maintaining a neutral rating.
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Analysts expect the share buyback to act as a support for the stock going ahead.

Edelweiss has maintained bullish view on Infosys with a ‘buy’ rating as the company’s deal momentum is strong, it has a digital focused strategy, valuations are not demanding and it has a high dividend yield of 4.3 per cent.

Elara maintained ‘accumulate’ rating but said investors should switch to TCS. The brokerage expects the valuation gap between TCS and Infosys to broaden in the former’s favour given the widening margin gap and similar growth prospects.
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BROKERAGES ON TCS
Analysts have largely maintained their ratings and target price on TCS.

Edelweiss said the company has the best digital and execution capabilities and despite its size, the company will report industry-leading growth. However, the stock trades at a rich valuation of 21.4 times FY20 estimated EPS, a significant premium to large-cap peers. “The current share price factors in the underlying sector tailwinds,” said Edelweiss.

Emkay also expects the company to maintain its financial outperformance among tier-I IT companies.

The revenue beat, coupled with improved banking momentum and relative margin resilience to Infosys should keep valuations at a premium, said UBS.


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