The new financial year is expected to bear better tidings for Infosys Technologies after a lacklustre FY13.
The growth differential between Infosys, whose results are out on Friday, and rival Tata Consultancy Services (TCS), is expected to narrow in the new financial year. While the latter may still retain its lead, the valuation discount of Infosys against TCS is expected to fall, say experts.
A Motilal Oswal Securities report dated April 8 believes growth and ineffective cash utilisation have contributed to Infosys trading at around 14 per cent discount to TCS.
“Infosys’ valuation discount to TCS has mapped the growth differential between the two companies. Excess cash in Infosys’ balance sheet, which has found little usage over the years, has weighed on its return ratios….Its lower payout ratio also contributes to Infosys’ overall valuation discount,” said the report authored by Ashish Chopra.
While he expects Infosys will begin to catch up with TCS in FY14 and FY15 in terms of growth, the manner in which the Bangalore-headquartered company uses its cash will determine if valuations too, will improve.
“We also see Infosys improving its cash utilisation going forward. Though this should result in an improvement in Infosys’ valuation multiples, we believe increase in payout ratio will be the key factor for valuation convergence,” he said.
Over FY2006-12, Infosys' aggregate payout ratio stands at 31 per cent, six percentage points lower than TCS's 37 per cent, noted the report.
Dipesh Mehta, research analyst at SBICAP Securities stated the payout of cash may help return ratios, which could have a positive impact on valuations, but he is betting on growth rather than cash utilisation to narrow the valuation gap.
“We expect the growth rate to converge for the two, though TCS is expected to do better…the discount will narrow but Infosys will remain at a discount till it consistently delivers better results,” he said.
He expects organic revenue growth of Infosys to be at 2.7 per cent and TCS to be at 2.6 per cent in the results season. TCS would be weighed down by depreciation in the pound, a currency to which it has greater exposure than Infosys, he said.
Pratik Gandhi, research analyst at IDBI Capital Market Services said though a cash payout would definitely be a positive, but he too believes that the growth differential will have to narrow before there is any significant convergence in valuations. “We are not of the opinion that there will be an immediate convergence in valuations. One needs to see some more confidence returning on growth before that begins to happen,” he said.
He expects earnings growth for Infosys to come in at 12.5 per cent for FY14 and 15.5 per cent for TCS.
Sandeep Muthangi, analyst at India Infoline expects a better year for Infosys. “There should be some convergence in the current year partly because Infosys saw an exceptionally bad FY13. But TCS is expected to do better over the medium term,” he said.<hr>
Gap to close?
Why Infosys trades at a discount?
- Growth has lagged TCS
- Return ratios weighed down by cash
- It has a lower payout ratio
What could change?
- Infosys growth expected to pick up pace in FY14
- It has, putting its cash to better use, recently acquired Lodestone
- May increase payout ratio