Mar 08, 2013 07:36 PM IST | Source: CNBC-TV18

Why Ambit Cap wants you to sell Infosys and Wipro

Ankur Rudra recommends selling Infosys and Wipro. According to Rudra, the current valuation of Infosys look stretched and expensive. Also, the street has high expectations on company's dollar revenue growth.

Ankur Rudra of Ambit Capital recommends selling Infosys and Wipro

The current valuation of Infosys looks stretched and expensive. Also, the street has high expectations on company's dollar revenue growth. If Infosys fails to meet expectations then there may be multiple contractions, he cautions.

"Our previous published target on Infosys was Rs 2,100 odd. We are revising our numbers. It will be in the region of 20 percent downside," he tells CNBC-TV18.

Meanwhile, fundamental challenges may make it difficult for Wipro to come back to industry level growth.

He is bullish on HCL Technologies and TCS from the tier one IT stocks.

"For HCL we are expecting around 15 percent dollar revenue growth for this year and volume growth maybe a shade higher than that. On margins, we are expecting 50-100 bps margin declines. TCS may also see 15 percent dollar revenue growth, which is close to flat margins," he said in an interview to CNBC-TV18.

From the midcap IT space, Persistent Systems and Redington (India) are his top bets.

Below is the edited transcript of Ankur Rudra’s interview with CNBC-TV18

Q: What is your sense? Is 14 percent something, which we should now factor in, in almost all the IT companies?

A: I would still be a bit more conservative about 14 percent number for the entire industry. We stick to the stance that there are companies which possibly can better this number perhaps Tata Consultancy Services (TCS), HCL Technologies, Cognizant come into that camp. For the industry as a whole that number looks on the higher side.

NASSCOM’s numbers are also bit more coloured by the fact that 20 percent of the numbers include captive. Captives are expected to grow much faster this year given the benefit of weaker rupee. Secondly, it includes only offshore revenues for US listed multinational companies (MNCs) like Cognizant, Accenture, IBM, where offshore revenues tend to go faster than the overall business. So, 12 percent is more realistic number in our view.

Q: What about Infosys? There was one quarter, which looked fairly good and now the management has been hinting that the internal operating environment has improved. But has the stock at Rs 3,000 run ahead of its fundamentals. How would you approach the stock now?

A: We agree to that. The current valuations of around 16.5-17 times one year forward seem quite expensive also these are build on somewhat stretch expectation. Expectations of dollar revenue growth for Infosys have now risen to 14 percent, which implies almost 12 percent organic growth.

This company is growing at about 5.5 percent organic growth rate for FY13. It is quite stretched to assume that it will go from 5.5 percent to 12 percent in a span of a year. For Infosys, expectation seems to be on higher side and if they do not come through then there will be multiple contractions as well. Infosys is one of our strongest sell ideas right now.

Q: What would the target price be on Infosys?

A: Our previous published target was Rs 2,100 odd. We are revising our numbers. It will be in the region of 20 percent downside.

Q: What is your sense about IT company margins? Ganesh Natrajan of Zenzar was saying that there is not too much by way of wage pressure just the average wage increase is perhaps. Would they do better in terms of margins?

A: We would think so. This year we are lot more optimistic of margins for the year and I would agree with Ganesh Natrajan. Two things are happening. One, on the external environment the supply situation has eased quite a bit compared to the previous year. The domestic supply of offshore labour and the ability to handle visas for on site staffing is better. The industry is better prepared this year than it was last year.

Internally companies have been able to drive a lot of operational improvements to include things like automation and increase resource utilisation levels. That makes us a bit more optimistic about maintaining margins this year. So, on the margin front we are in for a positive surprise over the year.


Q: Wipro is a stock which has started catching up compared to its peers in the run-up for the price improvement. In your conversation with the management how is Wipro likely to perform in FY14?

A: Wipro management remains more conservative on expectations for FY14. Given that they are coming off a relatively weak year, it is easy to understand why. They have invested a lot on their sales and marketing team particularly around new business development. That has been one of the areas where they have been struggling and it is yet to be seen whether the new team delivers.

The other challenge for them is outside of one of their verticals, which is oil and gas - they have not been able to do well in other verticals. That is the challenge for getting some of the other larger industry verticals going for them. For example about six-seven quarters back, the management had highlighted four-five momentum verticals for them - with the exception of one, the other ones have not fired yet.

Q: What are your buys and sells in the big guns?

A: Our top buy idea among the tier one names would be HCL Technologies followed by TCS. Although we are a bit less optimistic about TCS’ performance given how well this stock has done recently. We think it is probably closer to fair value.

We are seller on Infosys and Wipro. Infosys is driven partly by very high expectations right now. For Wipro we still see there are fundamental challenges to come back to industry level growth, they maybe a bit more than Infosys.

Q: Can you give us more colour on what kind of volume gains, margin gains you are expecting at least on the top guys, TCS, HCL, Infosys?

A: On HCL Technologies we are expecting dollar revenue growth in the region of around 15 percent for this year, volume growth maybe a shade higher than that. On margins, we are expecting 50-100 bps margin declines. We are ahead of the street on margins on that because people were expecting lower margins.

On TCS we are expecting in the region of 15 percent dollar revenue growth, close to flat margins. We are optimistic on maintaining margins of this year.
For Infosys, we see growth in the region of around 12 percent aided by 200 bps of inorganic growth from Lodestone and relatively flattish margins; their ability to maintain margins will be a lot better this year than it was last year. For Wipro we are expecting in the region of around 9 percent growth, volume led mainly and flat margins.

Q: What is the call on Hexaware Technologies? The stock has been externally volatile. How would you approach it?

A: We do not cover Hexaware but they have seen problems with one of the contracts recently, which is one of the reasons why the stock performance has been volatile. A part of its business is in the enterprise application space and part of the client based in the mid market.

So, the challenge we see in the mid market, system application products in data processing (SAP) focused or enterprise resource planning (ERP) focused guys is the challenge from the cloud is a lot and software as a service is a lot higher there. We have seen KPIT Cummins Infosystems suffer from that. That is one of the risk we see for Hexaware going into FY14.

Q: What are the midcaps stocks you are positive on?

A: We like Persistent Systems among others. Persistent currently trades in the region of around 10-11 times. It is one of the leaders in its niche of offshore product development. It has also been able to create a nice IP led business. Once we see a recovery in demand this business will be most levered to that growth and management’s ability to maintain margins, is superior to most of its midcap peers. Within the technology midcaps overall we also like Redington (India), which is a distributor where we see earnings growth accelerating as a result of their recent win of Apple iPhone contract in India and Info Edge India.

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