Tata Consultancy Services and Cognizant will continue to outperform its peers in the information technology industry, Cowen & Co, a US based financial service company noted after its recent interaction with several IT companies.
"I am assuming that both of these companies will come out with numbers that are stronger than last year," Moshe Katri, managing director, Cowen & Co told CNBC TV18.
Katri observed that there has been slight uptick in IT Budgets as well as discretionary spending. IT industry is going through fundamental changes as they move up in the value chain.
Below is the verbatim excerpts of the interview
Q: What has been the key takeaway from your interactions with the Indian IT companies? How much better will FY14 be compared to FY13?
A: So far during this trip we met about four or five companies in IT space. We met the Tier-1 offshore companies and the general takeaways have been relatively positive. The tone is positive. A lot of it is in line with the resultant survey that we published back in December. Our survey said a couple of things. It said there will be a slight uptick in IT services Budgets this year, a slight uptick in discretionary spending, an inline Budget cycle, i.e. no delays which is what we had a two years ago. The survey also indicated that some of the volatile areas such as financial services in Europe are actually going to be stable to slightly better. Continental Europe has a very, very significant potential for this space down the road. How much will this year be better than last year? A lot of it really depends on the actual vendors that we are talking about. We will probably continue to see this polarization that we have seen in the past few years between Cognizant Technology Solutions and Tata Consultancy Services (TCS) and the others. We are expecting Cognizant and TCS to have a better year. We have seen that in our survey in terms of our customer wins, in terms of clients' spending intentions and I am assuming that both of these companies will come out with numbers that are stronger than last year. The interesting thing about the sector is that it is going through fundamental changes. We are seeing in the past few years most management teams changing.
Q: Do you think the run up in the Infosys stock price is justified by its fundamentals? It has only been one quarter of stable earnings.
A: Infosys is a special situation. For many investors who did not notice Infosys was heavily shorted in front of earnings, roughly about half of the American Depository Receipts (ADR) flow was shorted, so it is about 30 million shares and I guess there was some sort of an expectation out there given the short position that the company was going to significantly reduce its revenue growth guidance for FY13 which is something that never really happened and the fact that numbers were in line, the fact that guidance was reiterated for the first time in many quarters I think convinced many people to cover their shorts, which has probably what happened. The stock has held up since then mostly because not all of that significant short position has been covered. So that is on one hand in terms of technicals, i.e. why is the stock up 20 percent or so since earnings.
The stock today is more expensive than Cognizant which will likely show top-line growth close to 20 percent this year. So I think there is a disconnect between valuation and fundamentals, but having said all that the fact that Infosys was able to meet its numbers, to reiterate guidance is positive for the sentiment for the space. So we like it. The question here is what sort of guidance Cognizant will provide whenever they release their numbers sometime in mid-April. Consensus expectations right now are very aggressive. They are calling for 16-17 percent top-line growth. I guess people are expecting Infosys to grow faster than the upper hand of National Association of Software and Services Companies’ (NASSCOM) guidance for the industry this year, but going from 5 percent top-line growth to 16-17 percent top-line growth year-over-year sounds very, very aggressive to us.