Infosys to stay on top: Why IT company's stock outperforms its peers

Robust deal pipeline, margin gain hopes have helped it to bridge the valuation gap with TCS

Infosys has been the best-performing front line information technology (IT) stock over the past year, gaining over 10 per cent. All its top-tier peers have, in fact, generated negative returns over the same period. 

The IT services firm’s outperformance is likely to continue, given the order wins, margin focus, and lower exposure to the slowing European financial services segment. Analysts expect the company — which had increased its growth guidance from 7.5-9.5 per cent to 8.5-10 per cent for 2019-20 (FY20) — to beat the upper-end of the growth target.  

“The company has the best near-term visibility among the top-tier IT companies. Given its strong deal momentum, it should surprise on the revenue growth front,” say Arya Sen and Ankur Pant of Jefferies. They expect the company to achieve a revenue growth number of 11.5 per cent year-on-year in constant currency terms. Strengthening of the sales team and increased participation in large deals have led the company to record an all-time high deal pipeline, with a value $2.75 billion in the June quarter.  

One of the reasons behind the Street’s preference for Infosys is the lower exposure to the European banking and financial services space, unlike its peers such as Tata Consultancy Services (TCS). 

Revenue decline in European financial services and the moderation in tech spending has been a worry for tier-1 IT companies. The impact on vendors, according to Kotak Institutional Equities, will vary, depending on the exposure to ‘challenged’ clients, potential share gains, and large deal wins. Kawaljeet Saluja and Sathishkumar S of Kotak believe Infosys is well positioned on this front, while others are vulnerable. 

With major sales investments behind it, the focus for Infosys will be on margin improvements. IIFL Research expects margins of the firm to witness sequential expansion, as residual wage hikes in the second quarter could be offset by absence of visa costs and foreign exchange tailwinds. The company believes it can hit the 21-23-per cent margin target for FY20. 

The positives are the reason behind the Street taking note of the firm’s growth outlook. In fact, the price-to-earnings ratio premium that TCS enjoys vis-à-vis Infosys has come down from the peak of 40 per cent in May 2018 to about 10 per cent now. Investors could look at the stock on correction.