Mar 08, 2013, 07.36 PM | Source: CNBC-TV18

Why Ambit Cap wants you to sell Infosys and Wipro

Ankur Rudra recommends selling Infosys and Wipro. According to Rudra, the current valuation of Infosys look stretched and expensive. Also, the street has high expectations on company's dollar revenue growth.

Ankur Rudra of Ambit Capital recommends selling Infosys and Wipro

The current valuation of Infosys looks stretched and expensive . Also, the street has high expectations on company's dollar revenue growth. If Infosys fails to meet expectations then there may be multiple contractions, he cautions.

"Our previous published target on Infosys was Rs 2,100 odd. We are revising our numbers. It will be in the region of 20 percent downside," he tells CNBC-TV18.

Meanwhile, fundamental challenges may make it difficult for Wipro to come back to industry level growth.

He is bullish on HCL Technologies and TCS from the tier one IT stocks.

"For HCL we are expecting around 15 percent dollar revenue growth for this year and volume growth maybe a shade higher than that. On margins, we are expecting 50-100 bps margin declines. TCS may also see 15 percent dollar revenue growth, which is close to flat margins," he said in an interview to CNBC-TV18.

From the midcap IT space, Persistent Systems and Redington (India) are his top bets.

Below is the edited transcript of Ankur Rudra’s interview with CNBC-TV18

Q: What is your sense? Is 14 percent something, which we should now factor in, in almost all the IT companies?

A: I would still be a bit more conservative about 14 percent number for the entire industry. We stick to the stance that there are companies which possibly can better this number perhaps Tata Consultancy Services (TCS), HCL Technologies, Cognizant come into that camp. For the industry as a whole that number looks on the higher side.

NASSCOM’s numbers are also bit more coloured by the fact that 20 percent of the numbers include captive. Captives are expected to grow much faster this year given the benefit of weaker rupee. Secondly, it includes only offshore revenues for US listed multinational companies (MNCs) like Cognizant, Accenture, IBM, where offshore revenues tend to go faster than the overall business. So, 12 percent is more realistic number in our view.

Q: What about Infosys? There was one quarter, which looked fairly good and now the management has been hinting that the internal operating environment has improved. But has the stock at Rs 3,000 run ahead of its fundamentals. How would you approach the stock now?

A: We agree to that. The current valuations of around 16.5-17 times one year forward seem quite expensive also these are build on somewhat stretch expectation. Expectations of dollar revenue growth for Infosys have now risen to 14 percent, which implies almost 12 percent organic growth.

This company is growing at about 5.5 percent organic growth rate for FY13. It is quite stretched to assume that it will go from 5.5 percent to 12 percent in a span of a year. For Infosys, expectation seems to be on higher side and if they do not come through then there will be multiple contractions as well. Infosys is one of our strongest sell ideas right now.

Q: What would the target price be on Infosys?

A: Our previous published target was Rs 2,100 odd. We are revising our numbers. It will be in the region of 20 percent downside.

Q: What is your sense about IT company margins? Ganesh Natrajan of Zenzar was saying that there is not too much by way of wage pressure just the average wage increase is perhaps. Would they do better in terms of margins?

A: We would think so. This year we are lot more optimistic of margins for the year and I would agree with Ganesh Natrajan. Two things are happening. One, on the external environment the supply situation has eased quite a bit compared to the previous year. The domestic supply of offshore labour and the ability to handle visas for on site staffing is better. The industry is better prepared this year than it was last year.

Internally companies have been able to drive a lot of operational improvements to include things like automation and increase resource utilisation levels. That makes us a bit more optimistic about maintaining margins this year. So, on the margin front we are in for a positive surprise over the year.

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