Earnings season: SP Tulsian bets on 3 midcap stocks
Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying video.
Q: Hexaware has been the darling of the IT space for the last three quarters. Do you think it is good for more?
A: Yes, the revenue momentum is still there. They have signed fairly large number of deals, especially longer term deals as oppose to past business mix which was more short-term oriented. So that does give some visibility on broad based and sustainable revenue growth in excess of 20%.
More importantly, we still see scope for margin expansion through various measures including SG&A, economies of scale and so on. So, all in all, we still see close to 50% earnings growth over the next two years. That will support further upside in the stock.
One of the important test for IT services companies that we have is dividend payout and Hexaware passes that test with 50% dividend payout. So, you get handsome 5% dividend yield also. That is the reason why we think the stock is good. We would see another 25% upside, if not more, over the next 12 months.
Q: Can you tell us about Graphite India and the kind of targets that you have on that particular stock?
A: Graphite India is an industry with high barriers to entry. They are one of the six players in the world and utilisations in the industry have been rising. We expect it continue to rise. As a result, the companies have been putting in place price increases and that will be effective in FY13 and will see that impact in those numbers.
Basically, because of that as well as the fact that company does hold a fair bit of raw material inventory at a lower price, that will also have the benefits in terms of the cost. We see 45% of earnings growth over next two years for the company. Again very good dividend payout history, as a results a 4% dividend yield. Our target is Rs 120.
Q: Nesco is something that you liked for a while. Do you think that one can still get into this stock at this point and what kind of targets would you have there?
A: We have been recommending Nesco for quite some time. The stock has actually delivered very good performance over the last 12 or 15 months. However, the real earnings kicker or the uplift of earnings is going to happen in the next two years. Infact we see 80% earnings growth over the next two years, both because of very strong revenues from the exhibition center as well as renting out of the new building III. That will lead to very strong rental income as well. So, it has a very high earnings growth. Infact in our valuation, looking at how many years of free cash flow is expected in this stock could easily double over next three years. But if you take more of a 12-month perspective, from current levels, 40%-50% upside is still possible.
Q: What is your expectation from Infosys this time? What will we get to hear in terms of guidance for FY13? Are you expecting to see any kind of disappointment there?
A: Clearly it is going to be a muted quarter, March quarter in particular. Guidance, if there is any, will be on a softer side. We believe that 12%-13% is going to be on the upper end, if they are going to give us guidance on the revenue growth. So that is the nature of the commentary we expect.
While we are seeing obviously pretty robust set of numbers coming out of US economy, our main view is that structurally the IT industry is maturing. As a result, the IT spending growth is decoupling from the corporate profit growth. Finally, that is having an impact on the offshore volume growth. So, I think that is really our main message.