Feb 08, 2013 04:04 PM IST | Source: CNBC-TV18

Ambit Cap's take on IT sector after Q3 nos

Cognizant came out with a healthy set of numbers and has beaten in terms of guidance. Their outlook remains mixed according to a lot of analysts. Ankur Rudra of Ambit Capital tells us how can we extrapolate this to the IT sector.

Ankur Rudra of Ambit Capital is cautious on the Indian IT sector. "The Indian IT result season began with a bang this time with better than expected headline numbers from Infosys. However, it ended with a bit of a whimper," he told CNBC-TV18 while sharing his outlook on the sector

He expects Tata Consultancy Services (TCS) and HCL Technologies to continue to perform better aided by the quality of their business model. However, Infosys and Wipro may face challenges ahead in terms of heightened expectations from the street.

Meanwhile, Ambit Capital is optimistic on the Indian telecom. "It is entering a phase of the market where regulations are becoming lighter and more acceptable. Competition is becoming a lot more rational," he explained.

Below is a verbatim transcript:

Q: How did you read the Cognizant's numbers? How have you read the European operations, do you think that there could be some amount of uptick in terms of Europe in CY13 or rather in FY14 for the likes of Infosys?

A: The Indian IT result season began with a bang this time with better than expected headline numbers from Infosys. However, it ended with a bit of a whimper.

Cognizant's numbers were inline for the last quarter. The guidance was widely expected to be upgraded following the slightly better than expected result season from the headline IT firms. Therefore, I was a bit disappointed with the overall CY13 guidance. Given the history of Cognizant leading industry growth, this sets a lower bar for the growth ceiling for the industry for CY13.

Specifically on Europe, I would not extrapolate a lot from the 12 percent sequential growth we have seen for Cognizant this quarter, given it is a smaller business for them, it is a smaller base. Also, it tends to be lumpier given it is a smaller part of their overall business.

Q: We noticed better than expected management talk from Infosys and even the Tata Consultancy Services (TCS) management sounded positive when they gave their guidance for their company, it is not a proper guidance but it was that CY2013 is much better than CY2012. In that light, is the Cognizant's result the reason why you are downplaying something or you were not convinced by the management talk?

A: The various indicators of demand in the industry -- such as the performance and the guidance from the likes of enterprise software companies such SAP and some of the larger global bellwether such as Accenture -- do not seem to be extremely optimistic about CY13 versus CY12. TCS management has been quite optimistic and credit to them they have delivered according to that. Therefore, I would be wary of extrapolating the optimism management sees about their business to the rest of the industry. That is the caution on TCS comments.

On the overall industry, if you see the numbers, the outperformance on a broad base was more on the margins and on topline like Tech Mahindra, HCL Technologies, Wipro, all surprised on the margins as oppose to headline growth.

Q: What is your industry growth expectation and what is your best of class, middleclass and lower end in terms of stocks?

A: I like the way you put it but I would not follow that when I say it. We expect the industry growth rate for the year -- that is likely to end now -- to be around 11-12 percent and for CY13 or FY14, it will at least be about 100 basis points (bps) lower than that. Therefore, I am expecting around 10-11 percent industry growth.
 
Cognizant sets the industry growth ceiling. So, 16 percent organic growth for CY13/FY14 is the leading edge. The lower edge probably will be a bit higher this time because we have seen a bit of a recovery at Infosys.

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Hopefully, Wipro will also get its act together and hence, the lower end of growth probably will be in the region of 7-8 percent as opposed to 5-6 percent in the previous year.

In the mid range, we see the likes of HCL Technologies, TCS probably deliver in the region of 13-14 percent.

Q: What is your view with regards to HCL Technologies?  There was management changes and they have a new President and CEO on board. What is your view with regards to HCL Tech and what we can expect from them especially on the Information Management System (IMS) segment?

A: We like HCL Technologies' story. It is one of the firms, which has seen dramatic improvement in its quality of business in the last two-three years. They have been able to enter many more Fortune 500 global 2000 accounts.

The management transition is relatively well planned. We knew back in July 2012 that Anant Gupta would take over and from that perspective nothing comes as a surprise. I think the fact that Vineet Nayar was visibly missing from a few typical analyst events may surprise a few people. However, I would not read too much into it right now.

On the infrastructure management side, particularly the remote infrastructure management service line, which is a strongest growing service line for the industry, HCL Technologies remains the top-class franchise and we keep seeing them winning more than their fair share of business right now.

Q: What about the small guys? Hexaware Technologies is expected to release numbers on Monday. Do you expect any sort of positive surprises from the likes?

A: Hexaware Technologies is interesting because -- they had somewhat brought down expectations at the beginning of December. Around the same time Infosys has also brought down expectations, driven to an extent by expected delays in spending. So, given how much expectations were lowered Hexaware Technologies could -- as a result of that -- surprise on those lower base expectations.

Having said that, I think Hexaware Technologies will suffer a bit more given its presence in more discretionary led service lines over the course of CY13 because we do not see discretionary spending improving dramatically this year. If you look at the comments that Cognizant made yesterday, they were not very optimistic about discretionary spending coming all back in CY13.

Q: A lot of broking houses as a house are pro IT, telecom, oil and gas, not the interest rate sensitives, which were the favourites of 2012, is that how Ambit Capital thinks?

A: I cannot speak for all sectors. I will speak for the sectors I do cover. On telecom, we are optimistic. We think we are entering a phase of the market where regulations are becoming lighter and more acceptable. We are entering a phase where competition is becoming a lot more rational and one can expect reduction in discounting and possibly even tariff hikes going forward, so we are optimistic.

On IT, we have a bit more cautious view. We think some of the better performing names such as TCS and HCL Technologies will continue to perform better given the quality of the business model. We are wary of assuming that there is a rising tide, which will lift all boats particularly the likes of Infosys and Wipro. We see a lot of challenges to the heightened expectations in Infosys particularly. So, we are a bit mixed on that one.

Telecom, we are more optimistic.

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