Infosys vs TCS shares: Should you buy these IT stocks post recent weakness?

Infosys and Tata Consultancy Services (TCS) failed analysts on the March quarter front and have seen cuts in their respective price targets. A lack of visibility on order wins is an issue, analysts said while expecting short-term pain for the IT stocks. This is even as both the stocks still remain a 'Buy' for analysts, as suggested by their price targets. Infosys' valuation differential with TCS stands at 15 per cent, but there is scope for this discount to increase, analysts said.

Net-net, the average price target for TCS at Rs 3,630 hints at a 15 per cent potential upside. Infosys' average price target at Rs 1,663 suggests 32 per cent upside potential.

HDFC Institutional Equities, which has downgraded Infosys to 'ADD' said it values Infosys at 20 per cent discount to TCS’ valuations based on relative growth discount. It expects Infosys to grow less than TCS in FY24, based on portfolio mix (relative differential between North America and UK portfolio and the relative weakness and strength in those geographies).

Nirmal Bang said all through 2022, the Infosys management was holding out hope likely on its interactions with clients and deal flow. In a sudden turn of events, worse than that for TCS (poor visibility), March  quarter has seen deferments and cancellation of projects, it said.

"Furthermore, some projects signed up did not start. It has been broad-based, like that for TCS, but unlike it, Infosys management says that there was some stabilisation in March (which saw SVB and CS crises in the US and in Europe, respectively). While TCS did not indicate how FY24 growth will play out, Infosys says growth will be evenly spread out over FY24," Nirmal Bang Institutional Equities said.

A lack of visibility is an issue, the brokerage said adding that Infosys had, just three months ago,  raised revenue growth guidance for FY23 to 16-16.5 per cent in CC terms from an earlier 15-16 per cent.

BNP Paribas said it sees a better risk-reward at TCS. "Given the heightened uncertainty at Infosys, we think  TCS is better positioned to benefit from the shift in customers’ focus to  cost-optimisation deals and it is our sector top pick," it said while suggesting a target price of Rs 1,675 on the stock.

Nuvama said Q4 results were disappointing and sees the lower FY24 guidance as a manifestation of the overall weak macros, which might keep Infosys – and other IT stocks – under pressure in the near term. Nomura India said Infosys' guidance was weak for FY24 and that growth differential with TCS is set to narrow, as the foreign brokerage downgraded the stock to 'Neutral' and cut its target price to Rs 1,290.

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