Given the improvement in visibility of demand recovery in the US, UBS Securities remains upbeat on the Indian IT sector. Post dismal fourth quarter earnings, the broking firm has reduced IT giant Infosys' FY14 EPS estimate to Rs 169-170/share.
“Our price target for Infosys is closer to Rs 2,900 now. But the risk reward is still favourable because the stock corrected pretty sharply. If we take Rs 169, it is trading at 13 times earnings one year forward which given our belief around demand recovery is still quite attractive,” he said in an interview to CNBC-TV18.
Meanwhile, private lender Federal Bank is relatively safe from collapses in gold price as the bank is pretty conservative in terms of lending against gold and its loan-to-value (LTV) is under control, he said.
According to Mahadevan, a larger portion of investors are still not so keen on buying oil marketing companies (OMCs) given the PSU nature of the business and the fact that operations of these companies are subject to vagaries of government policy.
"Tactically they seem interesting particularly given the diesel deregulation and fall in crude price. So tactically there may be interest," he added.
Below is the verbatim transcript of Suresh Mahadevan's interview on CNBC-TV18
Q: Where do you stand on HCL Technologies where numbers look pretty okay this morning?
A: Yes, we are quite positive on the IT space. I know Infosys did disappoint and HCL numbers seemed decent. But overall, our positive view is on demand recovery in the US and as the year goes on, the visibility gets better. Certainly, we are positive on the IT space at this point.
Q: Infosys was one of your top picks, so from what you have seen, will you change ratings and expectations on Infosys and now on HCL Tech?
A: In case of Infosys we had to cut our estimates a bit. We are now close to Rs 169-170 in terms of earnings per share (EPS) for FY14 and our price target is close to Rs 2900 now. But, the risk reward is still favourable in Infosys because the stock did correct sharply. If you take the Rs 169 number, it is trading at 13 times earnings one year forward which around demand recovery is still quite attractive. HCL has just come out so we did not have the chance to change our numbers but the numbers look good.
Q: The discussion point over the last few days has been the collapse in gold. Are there any stocks where you need to re-look at estimates, because you do cover Titan Industries and Manappuram Finance as well?
A: Yes, we do cover Manappuram, Muthoot Finance, Titan, Federal Bank. Federal Bank management clarified some of the issues and seems okay. The other three, we have to re-examine but it all depends on where gold settles in because if there is a sharp fall, some of these businesses could see some adverse impact. However, it also depends on where it settles in terms of gold prices. But certainly, the only company where we have written about is Federal Bank where things are pretty much under control because their loan-to-value (LTV) has been conservative in terms of lending against gold.
Q: Would you be re-looking at targets for some of the oil marketing companies (OMCs) or even for Oil and Natural Gas Corporation (ONGC) given the collapse in crude?
A: Yes, both collapse in crude and the fall in gold, bodes well for India and specifically the problem with OMCs is a lot of investors are not interested in these names. This is because of the PSU nature of the business and in the past it has been subject to the vagaries of government policy. Tactically, these things are interesting given the diesel deregulation as well as now crude price dropping. So there may be interest, but a large portion of investors don't find these companies investable because of the reasons I mentioned earlier.
Q: What about Reliance Industries, what did you take away from the results on Tuesday?
A: Reliance results were more or less in line. The gross refining margin (GRM) seems to be doing quite well. We are positive on this name and at this price the risk reward is quite favourable. Gas pricing has a big role to play and let us see how things develop, but we are positive on Reliance.
Q: You have underweight consumption at this point Do you think cracks will show up in the numbers of Hindustan Unilever (HUL) in this quarter itself?
A: We recently upgraded HUL after it fell to around Rs 440 levels and had a neutral before that. We are still positive on ITC. The reason we are underweight consumption is because a) the stocks have done very well, b) we are also not very negative on the market.
The data points are not encouraging especially around gross domestic product (GDP) growth and index of industrial production (IIP). But we don't have a negative view and given our positive view on the market, given how expensive consumption stocks are, we have an underweight though we have ITC in our portfolio; we end up being underweight on the sector as such.
Q: From which companies or sectors do you expect to see the weakest earnings in this quarter?
A: Banks could be interesting; you will have to watch them because there are some concerns around non-performing assets (NPAs) and so their results will be quite keenly watched. So would IT, after the Infosys disappointment all eyes are on Tata Consultancy Services (TCS). This is a stock that has done very well and rightly so because it has been performing quite well.
People are also looking at telecom companies results to see if there is any pick up in pricing. We expect a good quarter for the telecom companies.
Consumers should be okay, consumer growth and stocks are all priced for good growth so if there is any disappointment, the stocks will react negatively. However, if the results are good, they will stay there. I cannot think of anything specific suddenly.
Q: Tata Motors disappointed last quarter and since then the stock has been quite volatile and also very high on ownership for a lot of the institutional guys. How do you think this quarter will shape up for it?
A: Our analyst is negative on Tata Motors off late and his concerns are around valuations. This is because if you adjust the way they account for R&D, value this company and compare it with global peers, he feels it is expensive. So, we don't have a very positive view on Tata Motors though it keeps getting reviewed every quarter based on data points. At this point we are certainly negative on Tata Motors.