Abhijit Chakraborthy, Institutional Equity – Sales at Edelweiss has a view that Infosys’ numbers have been mostly inline and guidance is also broadly what the market was estimating. Having said that, in the immediate quarter and next quarter, there is not going to be much growth in terms of revenue and bottomline, he says.

Excerpts from the exclusive interview with Abhijit Chakraborthy:

Q: What’s the call on technology now and Infosys in specific?

A: Infosys’ numbers per se have been mostly inline and guidance is also broadly what the market was estimating. Having said that, in the immediate quarter and next quarter, there is not going to be much growth in terms of revenue and bottomline. Hence I feel the stock is fairly priced given the one year perspective.

But I want to make one point that this is suppose to be one of the bad year for Indian IT given the surroundings in the US business front as well as the fact that rupee is going to be a concern going forward also and in this bad year, if Infosys is going to give a guidance of 17% and maybe they can achieve 18-19% kind of a bottomline growth, then this is very good given the fact that you have the confidence of business gaining 20% growth in earnings terms going forward. So if you have a business of this scale and size of Infosys with a strong management and huge cash generation and long-term earnings growth of about more than 20%, then current levels are a good time to buy into the stock.  

Q: What’s your call on the market now, of course earnings season has just started but do you think the markets got a case to build up in the near-term or do you think we are still in a range bound kind of a situation?

A: Markets has surprised everyone in the last week-ten days time. I think there is clearly no catalyst for a market to go up in the short-term. However against everybody’s expectations, the market has gone up an it is not just one factor, it is couple of factors coming together; I think everybody in the market was on a short side and any marginal buying by long-term funds could have triggered a rally; it could have triggered a short covering in lot of stocks- that is what has happened.

Infosys’ results have been inline, it’s not negative. Reliance is seeing a lot of positive news flows in terms of refining margins, in terms of KG basin value unlocking happening there. So a lot of factors have come together to bring this kind of a sharp movement in the market. Having said that, I don’t think that we are out of the woods; there are still lot of risks involved in the market, everybody knows for a sure that we are going to see a lot of credit write-offs coming from US banks in this quarter results. GE result was just an indication of what things are going to be in future.

Even in India, the risk of a CRR hike is very real given the fact that RBI has stepped up its Market Stabilisation Scheme (MSS) activity in the recent past, I think CRR hike is very much on the cards. There are several reasons for the market trend down lower; in the short-term because of Infosys results because of short covering happening, some marginal buying happening by long-term investors, market could trend up higher by another 300-400 points. But I would like to be cautious not to get sucked in by this short-term momentum in the market, there are lots of things yet to pan out and clarity to emerge.     

Q: What kind of a range do you see the market in, if you believe that it may last for a couple of percentage points more but not much higher?

A: The thesis that I am coming from is that if you see the emerging markets worldwide, YTD, emerging markets on an average are down by about 15%. Among that, India and China, that were supposed to be the star emerging markets are down 22% and 30% respectively.

On the higher side as well, when the market was going up, we overshot our gains and on the downside also in that worldwide correction, I think we are overshooting the correction.

I think what is taking place right now is some kind of a mean reversion and if I assume that we are going to come back to the level of the world average, which is about 15%, then I would say there is still a 5-6% kind of an upside left for the market from the current levels.

Q: What are you expecting from pharmaceuticals this quarter?

A: In pharmaceuticals, I think the expectation is very low, as well as the fact that investor ownership also is pretty low. So, in terms of results if there is a slight improvement over the estimates, I would think there is going to be a decent kind of a rally expected on all the pharma stocks.

Q: What is your sense of how we will come out of this month? If the call is for a CRR hike from the RBI when they meet, how do you think the markets will take that?

A: I think so far what the RBI has been doing; they have been taking fiscal measures - government and the RBI - to control inflation. It has not materially impacted the numbers so far. The other step that the RBI can take is to take some monetary measures and within that I think rupee appreciation is one point that they can perhaps address. But given the export compulsions of the country, they might not actually address that issue.

The other best thing that they can do is suck out further liquidity from the system and that is why I feel that a CRR hike is very much on the cards. Obviously, it will be taken negatively by the market because it is going to put further pressure indirectly on the interest rates in the industry, as well as the fact that availability of credit is going to be an issue.

In these uncertain times of lending in the banking industry, what I am concerned about is that the RBI and the government together have been trying to control various industries from a pricing perspective to control inflation. On top of that, if there is uncertainty in the lending environment, then a lot of expansions could be delayed or postponed.

Also, you see a lot of capacity expansions are linked to equity raising ability of companies in the market. With the markets the way they are, I think we are yet to see the effect of all these downgrades in earnings coming from a slowdown from fiscal policies or monetary policies. That is the reason I am saying that we are not yet out of the woods. There could be a lot of issues, RBIs monetary policy coming into effect, re-rating of earnings by analysts, as well as the fact that the US is still throwing up a lot of negatives.

Q: How much upside there could be toInfosys from here. Today we have hit Rs 1,500 but what to your mind could be the upside in this move?

A: If one is looking at Rs 93 guidance for Infosys and historically we know that Infosys has always bettered its guidance. It wouldn’t be very optimistic to assume Rs 94-95 kind of EPS for Infosys for ’09 and in the short-term the PE band could be in the region of 16-17 but one year forward as the visibility from US improves in the Q3-Q4, I think boost the visibility on earnings as well as the PE will slightly get rerated. If I have to take a one-year call on stock, I will put a price target of anything between Rs 1,800-1,850.