second quarter numbers were quite strong, despite the company cutting its guidance, which makes broking firm Prabhudas Lilladher pick Infosys over Tata Consultancy Services
"The company has priced in all the negatives in its guidance. We believe that some of the headwinds the company is facing should ease in the medium term and the company is well poised to take advantage that might come in the medium term," said Ajay Bodke, CEO and Chief Portfolio Manager (Portfolio Management Services) at Prabhudas Lilladher.
In the midcap IT companies space, NIIT Technologies
and Hexaware Technologies
are one of the top recommendations in the medium term, Bodke said. He added that the broking firm expects Hexaware to put up a strong show in the September and December quarters.Below is the transcript of Ajay Bodke’s interview to Sonia Shenoy and Latha Venkatesh on CNBC-TV18.Sonia: Between Infosys and Tata Consultancy Services (TCS), if you had to buy one stock now, which one would it be?A:
Our preference remains firmly with Infosys. We believe that the second quarter numbers were quite strong although the company has cut its guidance. However, we feel that the company has priced in almost all the negatives in the guidance, because having had to cut guidance twice, the company has been extra cautious. We believe that some of the headwinds that the company did mention should ease in the medium term.
The company is well poised to take advantage of any upturn that might come in the medium-term. The valuations look quite comforting at just 15 times forward earnings, although the earnings growth also that we have baked in, is tepid around 10-11 percent compounded annual growth rate (CAGR) over two years. So, our preference will lie with Infosys over TCS.Latha: The midcap IT companies have actually not disappointed, Cyient as well as NIIT Technologies, anything that you like in the midcap space?A:
NIIT Technologies and Hexaware Technologies figure among the top recommendations for us with a medium-term perspective. In case of NIIT Technologies in fact, we have a target price of around Rs 590 over the medium-term, 18-24 months period. In case of Hexaware, we are expecting both the current quarter as well as the December quarter which is the third and fourth quarter for the company having calendar ending December to be extremely strong.
The company had given guidance that these two quarters will be very strong. So, there we are expecting Rs 260 target price in the medium-term based on a revenue growth of around 12.5 percent CAGR over 2017-2018 and a similar earnings growth for the company. The company is trading at quite attractive valuations of around 12 times in case of Hexaware FY18 earnings and NIIT is trading at just 8.8 times FY18 earnings. So, both these companies, we believe investors should look at with a medium-term perspective.Sonia: I wanted to ask you about the private sector banks because the numbers that have come in so far, whether it is IndusInd Bank or even DCB Bank that came in over the weekend was quite good. From that space, would you put money into either of these names?A:
Yes, in fact, that space in particular, we like a lot because we believe that in this environment of concerns about earnings growth, this is one sector, retail focused private banks where one need not worry at all about continuance of around 20-30 percent depending upon the franchise earnings growth CAGR over the next 2-3 years. IndusInd is a bank that we prefer a lot. The numbers were extremely strong, growth in both in the current account, savings account (CASA) as well as on the retail asset side has been quite strong.
The company’s guidance that they will be able to maintain the net interest margins (NIM) of 4 percent remains and we believe that there is a scope for the return on assets (ROA) to go up because the money that was raised last year, the company will be deploying it over time. So, Rs 1,500 is the medium-term target price that we have for IndusInd Bank.
In addition to that, among the corporate focused banks, we are closely awaiting the results of Yes Bank
and we believe that the pristine asset quality that the company had posted over the last two quarters should continue and the apprehension that a section of the markets had after the qualified institutional placement (QIP) issue did not go through, the results should act as an antidote and the market should rerate the company. So, IndusInd Bank and Yes Bank would be our preferred buys in the banking sector.Sonia: Any thoughts on what stocks you could be positive on post Essar-Rosneft deal?A: State Bank of India (SBI)
and ICICI Bank
stand as the two biggest beneficiaries of the Rosneft deal. Mr Ruia had mentioned in his interaction, a total of Rs 75,000 crore of debt will be repaid by the company. Rs 30,000 crore or USD 4.5 billion of loans that the promoters had taken to fund various projects would be retired and of the total Rs 80,000 crore of debt that the various Essar Group companies have on their balance sheet, half of it, Rs 40,000 crore would be repaid.
So that is how Rs 75,000 crore of total debt will be repaid. The prime beneficiaries in the Indian context would be, in our opinion, SBI and ICICI Bank. Standard Chartered Bank on the global context which has a large funding to the promoters also would be a beneficiary.Latha: Any other midcap results that you want to speak about that stood out for you?A:
Going forward, there are a few midcap cement names that we are closely watching. We expect strong earnings before interest, taxes, depreciation and amortisation (EBITDA) numbers coming in from HeidelbergCement India
Also midcap pharmaceuticals, some of the names we are closely watching. Glenmark Pharma
, we are expecting a large approval to come their way from Zetia, cholesterol lowering drug in December and that company should be a big beneficiary. Aurobindo Pharma
numbers also we will be closely watching. So, Aurobindo, Glenmark and Heidelberg are the three names in the midcap space that we will be closely watching.