Prefer HCL, Cognizant & TCS over Infy, Wipro: Nomura India

"Both Infosys and Wipro depend too much on near term deal flow for their FY13 growth. On the other hand HCL Tech or a TCS have already signed deal flow which would help them in posting front ended growth in this year," he explained.

However Nomura's top pick from the sector remains HCL. "The signaling value of a 100% stake sale by Vineet Nayar's is a negative, but would not read too much into it. It is still in the realms of speculation," he added.

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

Q: What were your takeaways from what the Infosys’ management had to say in their analyst interaction and the concerns they had to raise about the BFSI (Banking, Financial Services and Insurance) space?

A: Essentially what the management is talking about is that the seasonal increase or improvement which typically is seen from Q2 onwards has not been seen this time. The ram downs are continuing.

They are talking about that clients are reopening their budgets in BFSI in particular and there are cuts in budgets. They are talking about almost 5-15% cuts in investment banking and pushback’s in terms of regulation related spending. Only manufacturing and retail are the segments that they are highlighting will grow ahead of the company average.

Q: Given what you heard from them what did you take away and what should be realistic expectations for Q1 and Q2 for Infosys given that their guidance for Q1 was already quite tepid.

A: I think Q1 on a constant currency basis should largely track in line with guidance, but there will be cross currency impacts which could push it down. From a Q2 perspective, if the BFSI related acceleration is not coming through and that was one of the things which was assumed in the guidance, Q2 should be better.

But it will be how much better a difficult task here is because essentially they require more than 4.3% for them to meet their guidance and the chances of near about that or higher looks slightly remote.

Q: Recently Vineet Nayar of HCL Tech sold down his entire stake in the company relending to speculation that there might be some management changes afoot. Have you touched base with HCL Tech since then, are there any such indications that you have picked up?

A: HCL is not commenting or indicating that these are rumors and they do not typically comment on rumors. The signaling value of a full 100% stake sale is a negative, but I would not read too much into it. It is still in the realms of speculation.

Q: Wipro was the dark horse till the last quarter. What about that commentary, what did you take away from it and would you be concern that Wipro has the same problems that Infosys has?

A: Both Infosys and Wipro depend too much on near term deal flow for their FY13 growth whereas an HCL Tech or a TCS for that matter has already signed deal flow which would help them in posting front ended growth in this year.

That’s one of the concerns that in a scenario where decision making is slow and there are push backs in terms of deal decision making, building hope in terms of a second half recovery can be slightly dangerous. Our view still remains and we still stick our preferences with HCL, Cognizant and TCS over Infosys and Wipro.

Q: TCS has said that will speak or review things only by the end of June but are you confident that demand over there is all intact as you said it’s your top pick. Do you expect that to remain at evaluation premium to the other guys?

A: Our top pick still remains HCL Tech. But for TCS we think despite the valuations in which are a constraint in terms of giving absolute upsides we relatively prefer TCS over Infosys and Wipro. Our view is that if the front ended growth comes through in that scenario the risks to a constant currency mid teen kind of growth rates would be lower.

Q: What about Infosys valuations because when the stock collapsed to about Rs 2,200 a lot of people took a contrarian valuation call that it had sunk to such levels that it should be accumulated. But at the current level of Rs 2,500 do you have valuation comfort?

A: Our view on Infosys has been that you should not be playing the turnaround story purely on valuations. Infosys seems to be fighting multiple battles at the same time in terms losing share in cost efficiency businesses, higher value added businesses.

There are internal issues in terms of HR and visas that they have to contend with. We think pure valuations should not be used as the major for playing the rebound here. Things could turn worse before they improve.