For IT stocks, from a demand perspective, there is room for a lot of upside. Anantha Narayan of Credit Suisse sees the sector growing at 15-20 percent, going forward. But, Nasscom's Som Mittal is not convinced enough to up full -year guidance from 12-14 percent.
For IT companies, as per the last quarter numbers, the pickup has been across the board - both big and small companies - and that typically happens when the environment is turning to be a lot more positive for the sector, says Anantha Narayan, Director of Indian Equity Research, Credit Suisse. From a demand perspective, there is room for a lot of upside, he adds.
He sees the Indian IT sector growing at 15-20 percent, going forward.
However, Som Mittal, President, Nasscom, thinks it is too early to say if full-year guidance of 12-14 percent will be upped. He sees an uptick in demand from both the US and Europe.
On the Immigration Bill, he is not sure how fast it will move. It appears that the bill has been put on the back burner, he adds.
Below is the verbatim transcript of Anantha Narayan and Som Mittal's interview on CNBC-TV18
Q: There has been a genuine pickup in the US growth data, the US jobs data in the past five-six months, how much of an upside kicker do you think it can provide to some of the tier I IT companies?
Narayan: From a demand perspective, clearly there is room for a lot of upside and we have seen this in previous cycles. When the recovery happens it can take people by surprise. To us there were a couple of encouraging data points recently, first is when you look at the last quarter numbers the pickup has been across the board both big and small companies and that typically happens when the environment is turning to be a lot more positive for the sector.
Second is the two biggest segments that contribute to the sector are the US geography and the financial services industry and both these segments have seen some pretty strong growth in recent quarters. I think this is the beginning of a pickup and we could potentially get to an environment where growth rates of 15-20 percent will not be improbable.
Q: What is your sense, do you think after looking at what TCS had to tell last week to analysts as well the recent data from the US, Nasscom may perhaps find the risk to the upside for its forecast?
Mittal: It is too early to say whether we should change our forecast but I agree that the markets are looking good, I think there is recovery in the US and it is also been driven by the fact that technology is the center of all transformation and most corporations are going through this transformation.
We must also not ignore Europe at this time because Europe which typically outsources more had not moved towards the offshore at the same level but given that they have their own cost pressures we are seeing uptake also in Europe and this is besides UK which always was strong but I think in the Nordic areas, Scandinavian areas, also the Germanic space we are seeing this increase.
The drivers are not only by market but also integration of new technologies like social media, mobility, all these are now becoming integral to corporations as well. So a multiple of factors we see would continue to give positive signals here and we saw signs of it last quarter and I think the trend will continue this quarter as well.
Q: One of the things which have been weighing down on the sector in the minds of the market has been this Immigration Bill. Obviously with the US Congress coming back in session what has been the progress from India’s side - both at industry level or the government level - and where do you see that going in the next couple of months?
Mittal: The Congress in the US was in recess, but during this period I think with all the effort that all of us put together I think there is increasing realisation in the US that those negative provisions that impact Indian companies impact US corporations as much. So if those restrictions had to come through then the first impact will be on US corporations who actually don't have a choice because there is such a shortage in the US that if these people were not able to come to help those customers it would impact them.
Similarly, many of the technology companies are now realizing that a large part of the work that happens is on their platform so Microsoft, IBM, SISCO, it is these technologies that we are furthering. So one positive development that has come is that US corporations are weighing in, in fact they have written letters to the Congress saying that these negative provisions should not be there.
As you are aware that the house judiciary committee had already passed the bill without these negative provisions. We have assurance from a large number of Congress men that we have spoken in the house that they do not support these restrictive provisions and hence I don't think at least the House Bill will go with it.
Simultaneous to this I think some priorities have changed in the US, the possibility of intervention in Syria, the fact that the US Budget has to be approved is kind of taking priority and the Immigration Bill is little on the back burner at this point, it might come back later in October and then again in November the Congress goes into recess and next year is the election year so there is little uncertainty about how fast this would move. It seems to have lost a little bit of that momentum that it had in the previous session of the Congress.
But not withstanding what happens in terms of the priorities of the Congress we believe that those negative provisions would probably not be negotiated when it goes for conferencing between the two bills, the Senate bill and the House bill.
Q: What is your view on Tata Consultancy Services (TCS) now? At 20 times forward it does look quite expensive but now we have seen a lot of analysts indicate that the BFSI segment is starting to see a pickup and TCS has a big exposure to that almost 40 percent. How would you approach a name like TCS now?
Narayan: We continue to like the stock so needless to say valuations are becoming expensive but having said that and what we have seen in several past cycles is that as long as the fundamentals are strong, valuations do sustain. And at this point of time there is no real reason to believe that the fundamentals have any probability of becoming weak for TCS.
This is a company that is executing extremely well both on the sales front as well as in terms of just the delivery and clearly areas of strength like the US and financial services will help this company as well. So the stock can continue to sustain these premium valuations and there is no reason to get nervous about it at this point of time.