Visibility in IT sector cloudy: Cowen & Co

Moshe Katri, Managing Director, Cowen & Co, said Infosys bottomline is better-than-expected due to lower tax rates. He added that the decline in Infosys' European telecom business may be due slowdown in British Telecom, its largest client which fell 29% YoY.

Katri further said visibility in technology sector is still very cloudy and that the sector may see couple of quarters with flat sequential growth. He said that this time around focus has shifted from earnings numbers to balance sheet credibility. Macro bad news, he feels, is already discounted in price.

The top three stock recommendations, according to Katri, are Accenture, Cognizant and Infosys.

Here is a verbatim transcript of the exclusive interview with Moshe Katri on CNBC-TV18. Also watch the accompanying video.

Q: What do you make of the dollar numbers?

A: Not a huge surprise, and obviously, as you said, there are different moving parts and lot of different holes in the numbers. If one looks at the bottomline result they have done a bit better than expected on a lower tax rate and lower SG&A (Selling, General and Administrative) expense.

What is eye popping about the numbers are the declines in both telecoms in Europe. Telecom is down 15% year on year sequentially; Europe is on 4% year on year and 13% sequentially. However, I wonder if significant part of decline is related to the British Telecom--the largest client--which fell 29% YoY and 21% sequentially. So, obviously management is going to touch on that and if that's the case this is not a huge surprise because BT (British Telecom) seems to have been a troubled client for probably a couple of quarters now. BT now is about 6-7% revenues and it used to be about 10-11% revenues couple of quarters ago. These are some pretty big declines from one customer.

If you ask me whether we expected to see some of these trouble or weak metrics I would say probably yes. Will the stock be down on that news? Probably, but then one has to remember in the technology field visibility is still very cloudy.

I am assuming we will see some sort of gradual recovery in business signings and project funding maybe in couple of quarters. One is still going to have couple of quarters with sequentially flat comparison but when one looks at FY10, considering what all these companies do, which is pretty much offering cost effective solutions, we are still looking for Infosys to guide for revenue growth for FY10 that is something that you may not see in technology at all. So, a lot of this is relative to the technology sector in general.  

Q: We haven't spoken since the Satyam episode and Wipro as well, in light of that, does Infosys remain your top pick?

A: Our top picks in this sector include Accenture, Cognizant Technologies Solutions and Infosys, and one definitely will have to be patient here. However, looking at valuations and brand name recognition--here obviously the Satyam episode is creating some sort of a crisis of confidence. I am assuming most of these companies are going to move quickly to address a lot of the issues, if clients have any. Infosys has been around for a long time, we are expecting it to be around for long time and this is a sad event and hopefully that's going to go away pretty quickly.