In an interview with CNBC-TV18's Latha Venkatesh and Sonia Shenoy, Udayan Mukherjee shared his reading and outlook on the market and specific sectors.
Speaking about Infosys, he said he has not been very positive on Infosys or the sector for some time now. "But it is not getting better."
"The commentary from the management inspires zero confidence in my book, I would say now there is a prospect of material downside on Infosys," said Mukherjee.
Below is the verbatim transcript of the interview.
Latha: I won't start with Korea and Syria, let me start with Infosys. What did you make of the numbers, is this the beginning of disappointment?
A: That too looks a bit like Korea and Syria to me now after the communication from the management. I have not been very positive on Infosys or the sector for some time now, but it is not getting better. Last time we spoke, we were discussing how it might just be a range bound kind of stock with some downside, but I think now, having seen these results and the fact that the commentary from the management inspires zero confidence in my book, I would say now there is a prospect of material downside on Infosys.
It may not be Rs 950-1,025 kind of stock as I thought earlier; it may actually gravitate much lower from here. I know a lot of people are reluctant to put a sell out on that name, and I see a lot of the funds still owning quite a bit of Infosys. In fact many of the mutual funds have Infosys in their top five or top seven holdings. So, I think it is still a very well owned company and I doubt whether the larger institutional investors have actually walked out of the door on that name. So, they were probably hoping against hope or hoping that things would improve and they would stay the course and the stock would bounce back. However, now it looks like it will be another at least four to six quarters of hunkering down and then hoping that the things turn for the better.
So, they were probably hoping against hope or hoping that things would improve and they would stay the course and the stock would bounce back. However, now it looks like it will be another at least four to six quarters of hunkering down and then hoping that the things turn for the better.
In terms of valuations, there is no comfort at all for a stock which will probably grow in middle single digits in terms of earnings this year. If that, I don’t know why people are talking about paying 15 kind of price-to-earnings (P/E) multiples. I know historically Infosys has not traded much below that, but I think 12-13 P/E is absolutely ample in the kind of growth metric that we are surrounded by in the IT space now.
13 times Infosys expected earnings which may actually come lower than that, but let us say for FY18 it is Rs 64 earnings, 13 times 64 is 830. I think the stock could lose a Rs 100 from here and go down to those Rs 830-840 levels and over a period of one year, at best limp back to those Rs 900 kind of levels once again just looking out into FY19. So, I think there is material downside and if I was on the sell side, I would have no hesitation in putting a sell out even after such stark underperformance on that name.
Anuj: The other stock that I wanted to discuss with you was ITC because that has been one bit of strength point for the market, up 15 percent this year. Here a lot of people believe that maybe valuations are also comforting. What is your thought on the rally that we have seen in ITC?
A: I think there is a lot of relief on the fact that overall taxation structure will boast GST, not be very onerous on ITC and that was a sword which was hanging around ITC's neck or above ITC's neck for such a long time. Now that it looks like it is almost out of the way and ITC can demonstrate reasonable or moderate growth in the tobacco business, and some growth in the consumer business, it has got a very good balance sheet, it is probably trading at a big discount, maybe 30 percent discount to its peers like Hindustan Unilever (HUL) which one finds far more difficult to be more optimistic on and even stocks like Asian Paints and all which are trading at such significant premium to a stock like ITC. So, unless you have any moral problems about owning a sin stock, I think ITC probably is top of the heap in some of the consumer names because valuations are not in that stratospheric 40 kind of P/E level.
Latha: I just wanted to complete the IT point. Your worries with Infosys, does it extend to the entire sector?
A: In the past we have seen that some companies tend to do better than others, but generally when a large company is exhibiting very weak metrics, it is not very -- I know TCS did outperform Infosys for a fairly long period of time, but the backdrop was a little different out there. It was a question of the sector doing not so badly, but one company doing much better than the rest. So, I would not extend Infosys’ problems to all of them necessarily, but I think IT as a space will probably continue to struggle.
Look at pharmaceuticals; how many people thought that Sun Pharmaceutical will be at Rs 600 and that was a sector leader? And when it did that, you were struggling to find too many stocks in the pharmaceutical sector which were doing well; one or two exceptions. IT is a far more homogenous kind of an industry than pharmaceuticals is, so, I think maybe HCL Technologies, or TCS will do a bit better than Infosys. However, broadly, if I was a fund manager, I would be underweight IT and I would throw Infosys out of my fund.For entire interview, watch accompanying videos.