Cautious on the IT sector: Morgan Stanley Investment Mgmt

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Below is the edited transcript of this interview with CNBC-TV18's Latha Venkatesh and Ekta Batra. Also watch the accompanying videos.

Q: We are just in the shadows of the Satyam - Mahindra merger. We are getting these weak cues from TCS as well. What have you made of the IT industry in general? Would you approach it with caution or would you at the moment actually back off completely?

A: We are currently underweight the IT sector. If you see the result of the last quarter, of all the large majors, it wasn’t very encouraging, 1-3% of growth. Guidance for the current quarter is also not very encouraging.

Although the body language is suggesting that there is lot of deal flows, they are closing a lot of deals, they are engaging with clients, but it is not reflecting in the number right now. So, obviously things are not adding up. The hiring is also strong. But with all this, the numbers really don’t add up. So, I think we are currently a bit cautious. We want to wait.

It is suggesting that most IT companies are expecting a back ended growth for next year. They are expecting that the second and third quarter will be very good. The first quarter also for the next year could be reasonably weak.

Now, it’s very difficult to visualise so far down the line. So, we are currently taking a cautious approach on IT and we are currently underweight the IT sector. We will watch once Infosys gives the guidance and TCS results come out. After that, we will take a call on IT sector. But currently we are a bit cautious on the sector.

Q: The other big takeaways have been Budget as well as the monetary policy. What is your view on what happened in the Budget and consequently what we can see in the equity space as well as possibly from the RBI in April?

A: The Budget looks a bit difficult to digest, especially the fiscal deficit number. I think there are enough people who have already commented on that. So, our own view is that that number of 5.1% looks very difficult to achieve, unless you get some bonuses from some of the areas which we haven’t yet factored in, like some of the retrospective changes and large tax flows come in from there.

Even in the divestment target, the Rs 40,000 crore of collection from the telecom spectrum auction, all of that seems slightly stretched. Ofcourse the subsidy number itself is questionable. So, I don’t think currently anybody is really assuming that 5.1% is going to be achieved. If that is not the case then there will be a strain on the financial markets on the whole because of higher borrowing programme.

The other point which not very many people have highlighted is that out of the Rs 520,000 crore of fiscal deficit, almost Rs 3 lakh crore is interest payment. Almost 60% of your fiscal deficit is just the payment for your past borrowings. Now, this is constantly going up. That means that in two-three years time you will reach a stage where the entire fiscal deficit is borrowing and much more. So, something serious has to be done.

Currently, because of the political compulsions that we are seeing from the government’s side, they are not in a position to push through major reforms. Even a small reform like railway price increase for passenger fare is coming under question. So, I think it’s a very difficult situation.

RBI will have a very tight balancing rope. The only positive side is inflation because of whatever reason, it’s a Y-o-Y effect or whatever you can say will behave a bit better. Even assuming diesel price hike, say sometime in April, we still believe that the average inflation for next year could be somewhere in the range of 6.5%, somewhere in that range. So that’s the only positive thing.

But how much RBI will be able to cut interest rates is something which we will have to wait and see. We would assume say maybe about 75 basis points of interest rate cut starting April. So, we think starting April would be the first cut.

Q: What would you factor-in in terms of Brent Crude for 2012?

A: That’s the other tough call. One just assumes that Brent will be somewhere in the range of USD 100-120 per barrel currently.