Focus shifting from largecap IT cos to midcap: Dipan Mehta

Acquiring large clients and scaling them up is getting difficult for large IT player. So, the focus has now shifted to mid cap IT, Mehta said.

"The base effect for midcap companies is low. They are now getting gradually into mainstream as far as the industry is concerned and they are getting better recognition from the consuming side," he elaborated.

Below is the edited transcript of Mehta’s interview with CNBC-TV18. Also watch the accompanying video.

Q: Expectations from TCS later today, do you think that will be a stronger set of numbers?

A: They have been delivering a spectacular set of numbers beating street expectations consistently, so I see no reason why that trend shouldn’t change. The way these IT companies work is that the top management take certain steps, follow certain strategies, pursue certain accounts, verticals or geographies and then those give results two-three years down the line.

What we have seen is that from time to time the leadership position changes, if it was Infosys three-four years ago then it was the time of TCS and then HCL Tech came into reckoning. But they all have had their share of problems including TCS and Wipro and then the management has done something about it, changed the strategy or taken certain tough steps, changed the top management and then they have come back into reckoning.

So far TCS has done right things maybe two-three years ago and which is why the results are flowing through. Maybe Infosys was lagging which is why we are seeing disappointment in the last two-three years, same is the case with Wipro. But HCL Tech has come back into reckoning after they have done some acquisition, taken care of their risk management as far as the currency is concerned.

The leadership position may keep on changing and we do hope that Infosys also gets back its glory, which it had earlier an the other IT companies also continue to deliver the returns and take positive steps to maintain the growth rates. One thing is certain that the environment for large cap IT has undergone a sea change. It is very tough to get large accounts going in.

If you have got the accounts going then to scale up from the customer end is getting tougher. In such a situation, we are focusing more and more on midcap IT, where the base effect is low. They are now getting gradually into mainstream as far as the industry is concerned. They are getting better recognition from the consuming side. I would say that we are focusing more on that space. We do hope that large cap IT just about maintains industry growth rates.

Q: What about the currency? Is the market in a mood to rerate upwards some of the exporting sectors like IT, textiles etc. because of where the currency is standing right now?

A: That was one trend we were hoping for and kind of betting on, but it still hasn’t worked out. Hopefully, this earnings season the export oriented sector will throw us surprises whereby they show that the currency benefits have flown through the top-line, bottom-line and demand has not been impacted as much on account of either volume or price cuts.

It’s still kind of work in progress as far as that particular theme is concerned. But I am pretty much convinced that going forward if you want to bet on the next leadership sector whenever the market turns, the sentiment turns it has to be the export oriented sector.

We have got 20% plus devaluation of rupee and that has to percolate down to the corporate earnings for the export oriented sector, which hasn’t done so till now, but perhaps it’s a matter of time. Let’s just wait and watch. This earnings season is very critical from that point of view.

Q: What you have seen in that 5% dollar revenue guidance given by Infosys?

A: Everything that can go wrong has gone with Infosys. All that we can wait for is what the damage will be in next few months. This is one more nail in the coffin for the market and is really going to impact the sentiment. I do agree that it’s going to impact the sentiment for the entire IT sector and it doesn’t matter what the company is, which segment it is in.

Investors will get cautious on this sector purely on account of what Infosys has just delivered and what the commentary is. Very much nothing to look forward to as far as the trading day is concerned today. So, let’s see how much damage does in fact gets done. Hopefully, if there is some corporate action which we are not yet aware of or if the management commentary is slightly positive then it could have a bit of a mild positive effect. But let’s not bank on it.