Despite Tata Consultancy Services (TCS) posting better-than-expected result, it does not feature in HDFC Securities' list of top picks. Instead the house accomodated Infosys, which reported disappointing set of numbers in the fourth quarter. Speaking about the inclusion of Infosys, Dipen Sheth, head-Institutional Research, HDFC Securities told CNBC-TV 18 that the company will find its feet in the next few days.
Interestingly, HCL Tech which also posted good set of numbers, is missing from the HDFC list.
After a steep fall in crude, market analysts are wary about the oil and gas companies. Sheth suggests Cairn India as his top pick since it is least vulnerable to regulatory whims. “The upstream companies keep on contributing to downstream losses and you do not know in what proportion they will do it. Cairn India, to that extent, has the cleanest earnings profile and is most leveraged to crude,” he says in an interview to CNBC-TV18.
On the infrastructure front, Sheth is bullish on Larsen & Tuobro. L&T delivered in extremely challenging times and execution has never been a problem with that company, says Sheth.
Below is the verbatim transcript of Dipen Sheth’s interview on CNBC-TV18
Q: Since markets have responded to Tata Consultancy Services (TCS) today, I see Infosys in your top list but not TCS or HCL technologies. Can you take us through the rationale there?
A: We took the stand before the results came out and it has been challenged significantly by the numbers or the guidance that Infosys mentioned post the numbers. Infosys is a company which is in the process of healing and over a period of time, they will get their act right.
They had their nose in the sand to the extent that they were not compromising on their premium pricing. Some of that was coming off in the last couple of quarters and we were under the impression that they will be able to regain market share and get larger deal-wins.
I am disappointed with what Infosys has done. The stock also tumbled just like a quarter ago when it jumped up 20 percent, it tumbled by 20-22 percent after the quarterly numbers.
It is too early to call for a complete decline in the prospects for Infosys at this point of time. Maybe we need to be a little more patient with them. However, there are some virtues in the company and they will fight back. They are figuring out painfully, their less than compromising stand on pricing may not hold for too long and we are seeing some of that coming off; pricing is down.
It is a good company that will find its feet back in a while; maybe we need to be a little more patient than what we thought three months ago.
Q: The other one you have picked from IT space is Tech Mahindra. Beside the financial performance of the company, there are reports that some of the Satyam shareholders are opposed to both the timing of the merger and the share swap ratio, do you see the company being able to tide over those problems?
A: Yes. This will be a substantially large company. Fifth in the pecking order once the merger comes through with about 86,000 employees. So, that itself should take it out of the midcap valuation bracket and afforded valuations of more than 9 times where it is trading right now. We should be looking at 11-12 times once they get their act in order.
A lot of that has happened. There are contingent liabilities, there are claims and counter-claims. It is in good hands right now. It has fought back admirably from the brink of extinction if you look at the Satyam part of the story at least.
So, there is some faith there as well. It will not make us much popular right now in view of the dynamics that are playing out in the stock but is another instance where a little bit of patience is called for. I would rather be a little early in calling for this patience than chase the price when it moves up.
Q: Another interesting call is Cairn India. In the light of the collapse that is going on in the crude market, do you want to take another look at Cairn India or do you think its superior production profile will still be able to scud this price damage which is going on?
A: The reason we put Cairn India in our top picks in FY14 curtain raiser or strategy note as you would call it is that Cairn India in the entire oil and gas space is the one company, which is least vulnerable to regulatory whims. The entire downstream oil sector looks like a value buy and has been a value trap as long as I can remember.
The upstream companies keep on contributing to downstream losses and you do not know in what proportion they will do or every quarter there is a little bit of a surprise. Cairn India to that extent has the cleanest earnings profile and is most leveraged to crude.
Crude has fallen. I do not know how globally crude might behave because we are not experts in understanding global geopolitics and a little bit of a flare up in North Korea or explosion in Syria for example might drive up crude price and again they have been very volatile in the past.
I do not know how to predict crude prices globally. There has been weakness recently, so Cairn India would take a beating. However, within the oil and gas space in India, it is the most leverage to oil prices and the cleanest play and that is why its one of our top picks.
Q: Punjab National Bank (PNB) has neither been the best from the public sector undertaking (PSU) banks nor the cleanest in terms of delivering clean quarterly performance but why is that your pick from the bunch?
A: The obvious choice to make a value pick in the PSU space would be a very large bank like State Bank of India (SBI). A lot of bad stuff that was supposed to play out over the last couple of years at PNB in terms of asset quality irrationally fast growth in the face of deteriorating macro or business environment and then losing current-account-saving-account (CASA) traction, is all priced in. The bank is trading close to 0.9 times adjusted book.
While I do foresee trouble on the macroeconomic front for yet another year, it is interesting to note that PNB as the second largest public sector bank has a lot of negatives priced in. To that extent, it is a little different from the caution that we are advocating, but we see value there at the current levels.
Q: You are sticking with L&T from the infrastructure space just because of sheer delivery quality?
A: Yes and the other reason for L&T of course is that despite all the bad stuff that has happened on the macro, the margin crack has been marginal to say the least. The growth has not been as challenging as it has been for other players or asset owners. Here is a management that delivers against very terrible headwinds continuously for year-on-year (YoY). The last straw in L&T’s back would be further crack in margins that people are thinking of because a larger part of their order book is now from overseas where I suspect margins would not be as good as the rest of their business.
Two reasons why we are backing L&T are, one, they have delivered in extremely challenging times; execution has never been a problem with that company.
Secondly, you cannot ignore the substantial weight they have in the lead indices. So, if you wish to have anything in the infrastructure space, you have to be at least equal weight on L&T.