What makes Q4 disappointment a bigger pain for Infosys than TCS?

Infosys won deals worth $2.1 billion in the fourth quarter, lower than $3.3 billion in Q3. Meanwhile, TCS’ deal wins remained strong at $10 billion

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The top two IT majors of the country – Tata Consultancy Services and Infosys – have disappointed investors with their Q4 numbers missing the Street estimates on all fronts. The results have been an indication of the recession fear brewing up in developed markets, especially in the US and Europe.

While analysts expect both the stocks to see pain in the short term, Infosys might be a bigger loser because of its heavier weight in the index. Infosys has a 6.68 percent weight on the Nifty50, while Tata Consultancy Services has 4.31 percent weight.

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Domestic mutual funds are also significantly overweight on Infosys, compared to TCS. As per Prime Database, mutual funds held 16.04 percent of Infosys’ total share capital as of March-end against TCS’ 3.46 percent.

At 9:15am, Infosys opened sharply lower at Rs 1,250 on the NSE, down over 10 percent from the previous close. It also dragged the Nifty IT index down by 5 percent. TCS continued with its corrections after Q4 results, extending losses for the second day in a row. The stock traded 3 percent lower after taking a 1.6 percent knock on April 13.

Infosys’ price-to-earnings ratio at 21.34x is at a 23 percent discount to TCS’ 26.8x, and the Street believes this is justified. DAM Capital has reduced its FY24/25 earnings per share estimates for Infosys by 4.7 percent/6 percent, valuing it at a 20 percent discount rate to TCS.

Over the past one year, TCS has fallen 11.8 percent while Infosys has fallen 24 percent.

“Despite trading at a premium, we have always been bullish on TCS as it has a diversified client set. The company also managed to deliver a positive constant currency growth sequentially at 0.6 percent while Infosys reported -3.2 percent,” AK Prabhakar, head of research at IDBI Capital, told Moneycontrol.

Also Read: Short Call | IT in a rough patch; Infosys, Tata Motors, Zee, copper to chart market movement

Gaurang Shah of Geojit Financial Services also echoed the same sentiment. “Our order of preference is TCS followed by HCL Tech, Tech Mahindra and Infosys. We are most cautious on Infosys when it comes to deal wins,” he said.

Infosys won deals worth $2.1 billion in the fourth quarter, lower than $3.3 billion in Q3. Meanwhile, TCS’ deal wins remained strong at $10 billion, in-line with analyst estimates. Moreover, TCS’ mega deal with BSNL worth $2.9 billion is expected to be closed in Q1 FY24, which holds it in good stead.

From a technical perspective, charts suggest that TCS has enjoyed larger and longer periods of relative outperformance against Infosys and this trend will continue. “The relative strength line of Infosys against TCS topped out in April 2022 and since then it has been making lower tops and is below its 50-week moving average,” according to Milan Vaishnav of Gemstone Equity Research.

Just like the past 12 months, one can expect Infosys to continue to relatively underperform TCS over the near term, he added.?

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