This analyst believes TCS will continue to outperform Infosys — Here’s why

The growth story of India’s largest IT services company Tata Consultancy Services (TCS) shall continue the next year as well on the back of multiple triggers, according to stock broking company HDFC Securities.

Even as HDFC Securities’ IT sector research analyst Apurva Prasad remains selective of the IT sector and expects normalisation of growth rates over the next three to four quarters, he thinks there is still high growth visibility for TCS.

“The triggers are certainly around some of the mega deeds. The BSNL deal, for example, gives relatively high growth visibility for TCS for next year. At the same time, in the current environment, I think the company with its execution track record has a good chance of improving its margin. It has been outperforming on that front for the past few quarters,” he told CNBC-TV18 in an exclusive interaction on March 13.

From an execution standpoint, he said the current environment is such that deals are more cost-centric, there is cost optimisation and a lot more vendor consolidation, and there are captive takeover type deals — these support TCS, he asserted.

Prasad added that the outperformance relative to Infosys would continue on growth the next year as well, and that is what his broking firm is building in.

His remarks come at a time when TCS shares have given a return of 17% in the past six months as compared to Infosys, which has risen a little over 7% during the period.

Other IT stocks that HDFC Securities is positive on are Persistent Systems and BirlaSoft as they continue to deliver well. Prasad explained that a good filter to have for mid-caps is companies that are on the top-end in terms of magnitude of growth, to where there is relatively high near-term growth visibility and some possibility of upside risk to estimates.

“Persistent Systems fits there. They could be potential big beneficiaries of generative AI getting bigger. At the same time, there is also margin upside case, so Persistent Systems and BirlaSoft are two companies within the mid-tier space that we continue to like,” he said.

He is also constructive on LTIMindtree and has given it an ‘add’ rating. It's corrected a fair bit since the last quarter's earnings, he said, adding that at ₹5,200 the risk-reward seems to be quite favourable, while it may not have near-term positive catalysts.

Meanwhile, the brokerage has a ‘reduce’ rating on Wipro and Tech Mahindra as it believes the underperformance on growth and the margin catch-up is going to be tough as they need to get through industry averages and growth averages.

According to HDFC Securities, a large discretionary part in the current portfolio and a larger impact on BFSI than some of the peers are factors which would delay the recovery. On a relative basis, these stocks are expected to underperform and the ask becomes significantly higher at the current valuations.

On the other hand, the brokerage is of the view that Cyient is more attractive from a valuation standpoint but Tata Elxsi and L&T Technology Services (LTTS) valuation constraints are the factors why it is not constructive on these stocks.