Why Infosys is a better investment choice than TCS

Despite a weakened global environment and seasonal weakness in December brokerages are still bullish on the Infosys stock compared to its rival TCS as the tech firm has not seen any project cancelations or material price cuts so far.

Even though Infosys has lowered its revenue guidance for the third quarter, the company’s overall revenue growth relative to the environment is likely to remain healthy, says Morgan Stanley.

“Given the steep cross-currency impact for peers (-1.5 percent to -2 percent), Infosys’ second half revenue growth rate quarter-on-quarter is likely to outperform industry peers even if it reports towards the lower end of its guidance range,” it said in a note.

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Even brokerage firm Nomura has picked Infosys as a better investment avenue when compared to its peers because the rupee depreciation could cushion the firm’s margins and earnings. Nomura says Infosys will benefit the most from rupee depreciation, with lower forex loss impacts compared to TCS, Wipro or HCL Tech. The report says, “Valuations are already discounting the cautious outlook with TCS trading at a 15 percent premium over Infosys on our estimates.”

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However, it must be noted here that Infosys’ third quarter guidance was based largely on the pick up in activity among clients in the second quarter, which has how died down. Uncertainty in the global secnario means companies are rethinking big projects and do not want to burn too much cash.

In fact due to this uncertainty, the company has kept an unusually big gap of 2 percent between the upper and lower end of their guidance. This skepticism of client spending could impact Infosys more than its peers as 35 percent of its order book is comprised of discretionary spendrather than compulsory IT spend. But the company says they have already taken a conscious decision.

TCS on the other hand is more confident. They say that IT spending would remain subdued this quarter due to holidays and that discretionary spend will pick up only in February. They see no red flags and say decision making is taking place at both discretionary and non discretionary levels. Both the companies are confident about their margins as the benefits of a falling rupee will flow in.

Though TCS could look more predictable, Nomura maintains that higher returns are likely to be generated at Infosys because the company is poised for a rebound in the second half of financial year 2013. So any near term correction in Infosys stock prices due to some disappointment could be seen as an opportunity to enter the stock.