Apr 22, 2013, 12.59 PM IST | Source: CNBC-TV18

TCS, HCL will feel IT slowdown; bearish on auto: Kotak Sec

The problems faced by IT services majors Infosys and Wipro may not be specific to those companies, feels Sanjeev Prasad, Executive Director, Kotak Securities. In an interview to CNBC-TV18, Prasad said that at some point, HCL Techologies and TCS too would be hit by the slowdown in IT spending by global companies.

The problems faced by IT services majors Infosys and Wipro may not be specific to those companies, feels Sanjeev Prasad, Executive Director, Kotak Securities. In an interview to CNBC-TV18, Prasad said that at some point, HCL Technologies and TCS too would be hit by the slowdown in IT spending by global companies.

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Both HCL Technologies' and TCS' quarterly earnings have been matching or even beating market expectations consistently for the past few quarters.

On the macro economy, Prasad said that while the pace of inflation has been falling, the improvement in the Current Account Deficit (CAD) would be gradual despite declining crude oil prices. Wholesale Price Index (WPI)-based inflation for March fell to a 40-month low, raising hopes that the RBI will cut interest rates at its meeting on May 3.

Prasad says that India, which used to trade at premium valuations to other emerging markets, has lost its special status among investors. In general, investors are now more confident on developed markets than emerging markets, Prasad said.

He is bearish on the automobile sector as he does not expect a recovery anytime soon. Sales of two-wheeler and passenger cars have been falling for the past few months, due to a combination of high fuel prices, high interest rates and muted wage hikes.

Prasad is also bearish on the banking sector, as he sees smaller companies increasingly struggling to repay loans in time because of the slowing economy.

Prasad is bullish on pharmaceutical companies and says investors should focus on only those stocks trading at reasonable valuations.

Below is the verbatim transcript of Sanjeev Prasad's interview on CNBC-TV18.

Q: You don’t seem to be a big fan of IT. Did you not like the earnings this time?

A: There was not much to like. Fourth quarter numbers were anyway quite weak and the guidance that the companies are giving out, at least both Wipro and Infosys have given a pretty weak guidance. Wipro for the quarter, Infosys for the full year and the very fact that Infosys has backtracked on giving any guidance shows that how much uncertain the price environment is.

A section of the Street is still looking at the fact that this maybe more Infosys and Wipro specific problems, but we are not very sure about that, given the fact that two of the larger companies have disappointed. You have not seen very good statements by Cognizant, Accenture. So, it looks like this is more of a industry-wide phenomenon and at some point of time, will start affecting even the players who have been very good in terms of execution, like Tata Consultancy Services (TCS) and HCL Tech.

If Infosys and Wipro become more aggressive on pricing, and Infosys has pretty much thrown down the confidence that it is going to be more aggressive on pricing. In a demand environment which is not looking robust, if some players start getting aggressive on pricing, then you would have pressure across-the-board.

Q: The game changer through last week was what happened with commodities like crude. What have you made of that and what could be the ramifications for our market?

A: It is a good development. The issue is how long it can sustain. Good news is, at least globally, it looks that you will have a reasonably soft crude price environment, looking at the supply-demand balance. You have about 1.1 million barrels/day of incremental oil production coming from US. Libya is back to full production and so you have a lot of supply coming in. There have been question marks on demand, given China’s weak economic data for the first quarter. All that put together is resulting in some pressure on crude, so that is good news for India.

Every USD 1/barrel effectively saves us about a billion dollars in terms of crude oil imports on a net basis adjusted for the exports of products also resulting in a big improvement in the CAD and that India can certainly do with.

If you look at the current account numbers which has been a big concern for us and even now looks a bit of an issue, but at least it is improving, 2013 CAD would be in the range of around 5 percent. If we take oil at USD 105/barrel, which is our current base case then you are looking at CAD at about 4.1 percent of GDP. If we bring down oil to USD 100 which is where crude prices are at currently, then you are looking at CAD of around 3.7 percent which is a much more manageable number. Similarly you will have positive impact from the subsidies and fiscal deficit as well.

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READ MORE ON  Kotak Sec, CAD, WPI, inflation, RBI, macro, two-wheeler, ETF
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