Kotak Instl Eq cuts TCS, Infy to 'reduce'; lists negatives

Yesterday, Infosys shocked the street with its 5% revenue growth guidance for the full fiscal against the 8-10% it projected in April. But TCS ' results were above market expectations, indicating the problems faced by Infosys may not be industry wide.

The two companies account for nearly a quarter of India's software exports.

TCS does not make revenue or profit predictions, but on Thursday, Infosys stopped the practice of guiding for the next quarter saying conditions were too volatile.

Nasscom has forecast that the IT industry will grow 11-14% in the year to March 2013. Saluja expects the industry to grow at 8-10%, while he sees TCS growing at 11-12% in FY13.

However, he informed that his Kotak has downgraded both TCS and Infosys to 'reduce' earlier today. "We have cut TCS target to Rs 1,125 a share from earlier 1,280 a share, while Infosys trade has been reduced to Rs 2,350 a shared from Rs 2,850 a share earlier," Suluja told CNBC-TV18 in an interview.

Below is an edited transcript of the interview on CNBC-TV18.

Q: How did TCS perform in terms of earnings?

A: TCS reported a good performance pretty much in line with our estimate. Their dollar revenue growth, EBITDA margin, net income was in line and they continued to execute well. The strong execution is reflecting in a solid financial performance and recent stock performance as well.

Q: Can it continue to defy the sluggishness in the macro environment overall? They have been beating it every quarter so far and the management sounds confident, but would you expect the environment to catch up with them in the remaining quarters of the year?

A: We expect the industry to grow at lower than what the NASSCOM has guided at around 8-10% in FY13. As far as TCS is concerned, they have been executing better. So they might grow a little bit better than our forecast of industry. They might end up growing by 11-12%.

But I guess it does not takeaway from the fact that there is a slowdown in the market and the key focus areas of Indian IT companies which is the North America, BFSI and telecom axis has actually shown a material deterioration in the spending trends. This will basically reflect in performance of all companies including TCS. Within the sector, there would be been certain companies which would perform better, then there would be certain companies which would perform weaker depending on the business portfolio mix and the execution strategy.

Q: Have you marked down your numbers significantly after Infosys delivered yesterday, what are your new EPS or price target projections for that stock?

A: Before I talk about Infosys, let me just highlight that we have downgraded the entire IT services space from an attractive coverage view to a cautious coverage view. We have downgraded all tier-I IT names to a reduce/sell rating. Now specifically on Infosys, what we have done is essentially cut our earnings estimates by 2-9% for the next two years and cut target price to Rs 2,350 from Rs 2,850 earlier.

Q: TCS says it will beat the NASSCOM guidance but what looks more likely that NASSCOM brings down their own guidance and then TCS says we are still on a beat mode over here or do you think NASSCOM holds their guidance which will actually be a huge slap in the face for the company like Infosys where everyone is saying more optimistic things than them?

A: As I said earlier, I believe that the NASSCOM guidance of 11-14% is aggressive. What we are looking at internally is a revenue growth of 8-10% for FY2013 and we are expecting TCS to grow at 11-12% for FY13 overall. So in any case, we don’t expect the industry to grow at the same rate. There has been a marked deceleration in growth, new deals flows in the financial services and a host of other verticals, and that in a way, would make for the industry to achieve the NASSCOM growth target all the more challenging.