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Why are Infosys and TCS showing divergence now?

The games of allocations is going on in the IT space, Global players and the domestic players would like to park large amounts of money in this space, given the fact that the investible surplus in the markets have actually gone up. That is the reason we are seeing a larger allocation of money into larger companies, says Deven R Choksey, MD, KR Choksey Investment Managers.

What are you making of the IT rally? Other sectors aside, even IT has staged a very big move, wherein names like Wipro have surged about 9.25%; there’s a 27% move in MindTree, 11.5% in Mphasis, 19.5% in . Infosys, on a month to date basis, has lagged the rest of the IT basket. Could play catch up to the rest of the IT pack?
The fundamentals of the company remain extremely strong and convincing. The current headwind is due to the income tax portal of the Government of India where probably some amount of negative news has come and that is where the market is a little bit more conscious. But all the same, Infosys remains an absolutely convincing buy. Their focus on the digital and cloud is paying off very well. They have been cornering a significantly high rate of growth on the digital and the cloud space. That is where it is one of the largest companies and it has been growing customers for projects that probably last for a period of five to seven years. Such customers are regularly coming in on a quarterly basis and that is giving confidence about the company’s steady performance going forward.

So from the perspective of looking at the entire IT pack, call it the game of allocation. Global players and the domestic players would like to park large amounts of money in this space, given the fact that the investible surplus in the markets have actually gone up. That is the reason we are seeing a larger allocation of money into large companies. We believe that somewhere in the 90s, the kind of programme that Indian IT companies ran similar such kind of programme has been seen happening.

Now as far as Indian IT companies are concerned, digital and cloud computing space is basically resulting in a higher amount of growth traction locally as well as globally and this is where we are likely to see larger contributions from IT companies. We believe that the companies which have developed the large capabilities would be in a much better position to win some of the large-sized contracts because the world itself is asking for a significant movement. We remain confident and we believe that though some of the Indian IT companies are trading a little bit expensively due to allocations of higher sums of money, in corrective markets they would become a good buy opportunity.

We are talking about IT as a buy. Now let us look at the divergence in the last one month. TCS numbers were not great yet the stock is up 20% in the last one month; Infosys numbers were good and the stock is up only 6% in the last one month. Why is the divergence between Infosys and TCS very visible now?
My understanding is when larger sized funds get allocated in the market, they would probably chase the companies which have got a larger amount of market cap and I think that is one of the reasons for which TCS has ended up getting the larger allocation of money. Also, due to some headwinds in the Indian market, Infosys is probably not able to attract that amount of money. I think this is a temporary issue and at the same time, it provides an opportunity to enter into the stock because the fundamentals of the company remain extremely strong.

The quarter on quarter run rate that they have been maintaining in winning new customers is far more convincing. At the same time, the digital and cloud computing space where have been registering a higher rate of growth, is also sounding extremely convincing from the point of view of margins.

The market at times remains indecisive about allocation of money into such companies and I am not completely surprised. Last year also, Infosys ended up attracting relatively less amount of money but subsequently it caught up. So my view is this could be an opportunity to buy into Infosys.

TCS remains a great company. They are getting a better number of contracts from the global market where the entire world is moving in the direction of digital first and these companies are gaining because of their ability to service the different geographies. So from that perspective, TCS remains strong even though in one quarter, they may not have performed as well. But the potential remains extremely convincing.

When real estate grows and realty sales increase, it is not just the developers who benefit, it is the whole ecosystem and that is why when we say realty, we include so many other moving parts – paints, tiles, ceramics, etc, home appliances, consumer durables. How are you looking at this theme and how would you play it? Which are the ancillary stocks that would benefit?
Real estate as space would probably have along with it about 250 different industries which means that some of the names which you have mentioned like tiles, paints, cement, construction and PVC pipes would probably experience quite smart growth.

The demand scenario looks absolutely convincing. On one side, the pool housing programme of the government is continuing, where they are providing houses to masses and on the other hand, in the urban areas, we are seeing a faster pace of constructions largely because of a surge in demand. Also since lower cost of interest is available for buying the houses, residential real estate is particularly seeing a lot of traction. In my view, for commercial real estate, a little more time is needed before it can come into reckoning, but the residential real estate is likely to do too well.

One of the important developments which happened in the country after the introduction of RERA, is that organised players are dominating more than unorganised players and there is the possibility of some of the larger companies becoming much larger. From an investment point of view also these are better. Ancillary companies can be considered on a selective basis, maybe in the area of paints, cement, ceramic tiles or luxury accessories. These are the areas where one is likely to see larger growth.

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