Bhavin Shah, CEO, Equirus Securities picks Hexaware as his favourite midcap IT stock. In an interview with CNBC-TV18, Shah said, "Hexaware can deliver 20% plus dollar revenue growth in the calendar year 2012 with a target price of Rs 154."
Below is the edited transcript of his interview with CNBC-TV18. Also watch the accompanying video.
Q: Hexaware has really been the start in the midcap IT space but, this time people were not so enthused by what they heard in Hexaware's guidance. How do you approach that stock and do you think there is still a case to be made for its last year like performance?
A: I think last year's performance is difficult to repeat but, we still think Hexaware can deliver 20% plus dollar revenue growth in the calendar year 2012. First quarter results and the commentary about 2nd quarter provided confidence that they remain on track.
A lot of other indicators were also quite robust. Contribution margin which is revenue minus cost of employees remains the best in the midcap category and the cost for employees is now among the lowest. They continue to pay very good dividends, 58% dividend payout in this quarter.
We were pretty happy with the results and on the back of a fall in rupee, assuming Rs 51 going forward, we increase our target price to Rs 154.
Q: That is assuming a 20% growth or do you think there will be through the course of this year some kind of guidance upgrades from the management?
A: We increased our estimates by about 6% in rupee terms and in terms of dollar revenue growth I think we are assuming just north of 20%.
So far there are no reasons to assume there will be guidance upgrade. The upside in the stock is purely going to come from delivering along these lines.
Obviously Hexaware - trades that are reasonable, multiple compared to its growth rates and as the growth continues, the share price can appreciate. Remember, there is very healthy dividend payout.
Q: What about Gujarat Gas, it's been embroiled in other kind of controversies etc but on the core numbers how did you read them?
A: Gujarat Gas has adopted the strategy of focusing more on the higher value added customer. They have been raising prices significantly and the impact is visible in their volumes.
Volume was below our expectations and has been soft for last two quarters. This quarter, it also had an impact on the margins which were below our expectations. The results were slightly better than the fourth quarter, the December quarter. So, there was an improvement from there.
For a meaningful improvement, we'll have to see and ultimately as you said, the big issue is the overhang with respect to regulation and so on. We actually have a short rating and target price of Rs 310 and until some clarity emerges it’s difficult to get more positive on the stock.
Q: The big trigger also for Gujarat Gas was of course what happens in terms of that BG (British Gas) stake sale. Do you think that – there is a spanner in the works over there because of this PNGRB (Petroleum and Natural Gas Regulatory Board) note and the potential impact in terms of what exactly Gujarat Gas could finally get valued at?
A: Yes, absolutely! I think there were not too many bids first of all and there will be some revisiting of the valuation post the recent regulator ruling. It remains to be seen where that stake sale ends up at. Whether it happens or not and happens at what price.
Q: You have also picked out L&T Finance Holdings. What did you make of those numbers?
A: L&T Finance Holdings results came 16% (net profit) better than our forecast on the back of very good cost management. The costs were below our expectations and we also think that there is an improvement in asset quality.
Going forward, we think, it will continue and the credit growth rate has been very strong. This company has delivered very strong growth rates in the past as well. So, we upgraded the stock from neutral to long. We had previously set a target price of Rs 47, we upgraded to Rs 54 and also increased our estimates for FY13 and FY14 on the back of the results.