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Why Sandip Agarwal of Edelweiss prefers Infosys & Tech Mahindra to TCS

No reason for any disappointment in TCS although valuations are high, says Agarwal.

ET Now|
Jan 10, 2019, 01.33 PM IST
Sandip Agarwal-Edelweiss-Sec-1200
We like TCS from execution perspective and management quality and other parameters, but it has always been very expensive, Sandip Agarwal, Associate Director, Edelweiss Securities, tells ET Now.

Edited excerpts:

Q3 is seasonally a soft quarter and the rupee too is stable now after strengthening in the last couple of months. Do you expect IT sector to repeat 2018’s growth or do you think 2019 would be tough amid the macro headwinds?

We have come out with this series called Most Bullish in a Decade in January last year and since then, we have seen a very handsome return on the stocks. I still believe that there is a lot of money to made over next two-three years. My stance has not changed since then. While there is impact of US economy and other factors, the bigger picture is that big money is shifting from traditional spheres of marketing budget to digital budgets.

That does not necessarily need a bigger pie of spend going to IT. It actually means reallocation of spend from marketing to digital marketing or digital bit. That should ideally help Indian companies.

Secondly, in digital, since we are basically outsourcers, we have always seen in the past that whenever a new technology comes, our company struggle for a year or two. This we have seen in 2016 and 2017 because digital proportions were lower. Our manpowers were not skilled enough to deliver it. But now via continuous training and hiring of local talent, we have arrived at a good mix which is capable of delivering digital. I honestly believe that in case of a macro headwind, there will be some impact but the benefits will be larger because of shift of budgets from marketing to digital marketing.

We maintain that stance simply because mathematically digital revenues are now crossing 30-35% for each of the IT company and they are growing still at 30-40%. I do not see any reason to change that stance of shift of 6% growth rate to 8% this year and to 10% next year. I do not believe that will be derailed unless there is some big crisis which we are not aware of.

What are your expectation from TCS and Infosys results?

We are building almost similar growth for both TCS and Infosys. We are building 2.2% constant currency growth for TCS and 2% for Infosys and we see a margin expansion of 80 bps for each of them. We are broadly forecasting similar numbers for both revenue and margins. The simple reason is in all our channel checks suggest that the momentum on deal win announcements in BFSI and retail has actually gone up.

Secondly, in this quarter, we have not seen much negative impact of any aggravated furloughs in the manufacturing and finally in last two, three years, there has been some negative impact of 20-30 bps because of floods in Chennai which has not been the case this year. The revenue growth will be good and the margins should expand. I do not see any reason for the stocks to show a muted performance in 2019.

How would you place TCS in the pecking order within the IT names? Do you think that in a seasonally weak quarter, that pecking order would be maintained or from a valuation standpoint. would you evaluate some of the other names?

TCS has been a consistent performer but Infosys has been our preferred pick for the last two, three years followed by Tech Mahindra. TCS, we like a lot from execution perspective and management quality and other parameters, but it has always been very expensive.

We believe that there will be instances of time correction in the stock. Right now, the gap between Infy and TCS valuations is a little high and we continue to prefer Infosys and Tech Mahindra versus TCS. But I do not see any reason for any kind of disappointment in TCS although valuations are high.

Also Read

Expecting a 50 bps margin improvement in Infosys: Sandip Agarwal, Edelweiss

Take a 2-3-year view, there’s money to be made in IT: Sandip Agarwal, Edelweiss Financial

Infosys would be right to go for buyback: Sandip Agarwal, Edelweiss

I would sell TCS at this price but hold on to Infosys: Sandip Agarwal, Edelweiss

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