Religare Capital positive on Infosys, sees 3-4% upside

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The second quarter result of Infosys came in line with market expectations. The company reported consolidated net profit of Rs 1,906 crore, up 10% from a year ago, while revenue was up around 17% to Rs 8,099 crore.

Manoj Singla of Religare Capital Markets, in an interview to CNBC-TV18, gave his view on how Infosys will perform going forward. Singla feels that stock would continue to move up another 3-4% in the short term since a large number of people were not holding the stock before the second quarter results were announced. "We expect more positive surprises from Infosys in the next few quarters, and hence, we are positive on Infosys," added Singla.

Below is the edited transcript of the interview. Also watch the accompanying videos.

Q: Your thoughts on Infosys and how much more upside do you expect in the near term?

A: Given the fact that a large number of people were not holding Infosys in large quantity prior to the results, the stock would continue to move up another 3-4% in the short term. We continue to believe that the company has more surprises in store over the next few quarters. We remain positive on the company.

Q: Earnings season has begun quite well. Do you expect it to progress smoothly or do you see a lot of bumps along the way over the next couple of weeks?

A: None of us expected the earnings season to begin so well. It is widely expected that there will be a lot of bumps along the way this time. IIP is slowing down; we would see consumer discretionary spends slowing down as well. We would also see growth slowing down for many domestic companies. Most people on the street expect that this is going to be a weak quarter for India Inc. I don't expect a great quarter this time around.

Q: TCS still remains a best buy despite stronger Q2 results posted by Infosys. Would you agree with that or do you think because of the under performance of the stock, it is a time to give greater exposure to Infosys?

A: We have been advocating Infosys over TCS for the last three-four months; if you look at the quarter, TCS will come out with better numbers than Infosys. Infosys will start to accelerate growth in the following quarter, especially when the stock can outperform TCS. Between the two, the preference will go for Infosys. However, both stocks will do well. 

Q: Is there comfort right now for you to subscribe levels in terms of earnings growth for the second half of this year and for FY13? What the market should do?

A: The situation has become more volatile globally. It is very difficult to take a call on how 2012 will pan out in terms of economic growth of the US and Europe. The situation is going to remain volatile, and therefore, the IT sector will also remain volatile. It is very difficult to say how FY13 for the sector will pan out.

Demand for IT services in the next three to six months is holding up very well. Guidance given by Infosys indicates that things are holding up well. I expect to get a similar commentary from TCS and Cognizant; one has to be cautiously optimistic. The situation will remain fine for the next three to six months.

Q: How do you approach Maruti ? The labour problem refuses to go away; how do you price in all this as an analyst?

A: It is very difficult to take a call on these six sigma events. From a short term view, it is best to stay away from the stock till we get a firm resolution on this issue. However, at the current share price, Maruti is looking good if one keeps a slightly longer term view around 12 to 15 months. Once the labour issues are resolved, one can look at good upside in Maruti in FY13 than FY12. But clearly from a timing perspective, one needs to wait for how this problem resolves because thee labours can hurt production for a long period of time.

Q: Do you like Tata Motors, which had a 20% rally over the last 10 days?

A; We like Mahindra & Mahindra . They received fantastic response on their new launches; rural segment is where M&M is one of the best bets in the auto space. We also like Tata Motors; there will be positive surprises on the Land Rover side from Tata Motors over the next few months. We think the market consensus has become too bearish on that. So, both M&M and Tata Motors are our top picks.

Q: The telecom sector had a bit of a rough ride over the last few days. How are you reading both the currency concerns, the policy takeaways? What did you make of it?

A: On the currency side, not only telecom but any company, which has foreign debt is going to book some losses; we have seen that in Syntax as well. This is more of a short term, one quarter issue than a fundamental change in terms of sector earnings. So, there would be some forex losses for Bharti in this quarter.

Guidelines for the new telecom policy seem to indicate that the government clearly wants to provide a good exit route for some of the smaller companies, which will again make the incumbents very strong. So Bharti, Vodafone, Idea will continue to see good growth over the next 12-18 months. 

So we remain fundamentally positive on telecom, given the fact that Bharti has come off. We like both Bharti and Idea at this price. Idea is little expensive, but the company is delivering very well. So, both companies will give good returns over the next couple of months. 

Q: What are you expecting to hear from the banks this quarter in terms of results? How would you be positioned there?

A: On banks, we expect a slightly soft quarter. Growth is coming off. There is some expectation of compression in NIMs as well. However, some of the banks can also positively surprise and you might not see that much of NIM compression as people are expecting. The NPL cycle is a matter of concern. So net-net, the banks should have a modest quarter.

On a top-down strategy, we are overweight on banks. If Indian market has to have any rally, it would be led by banks. The RBI policy on October 25 will be a deciding factor. If we get any sense from the RBI that they are close to the peaking of the interest rate cycle or they would not do any rate hikes going forward, then banking is the first sector to get a big rally.

Q: You have replaced ONGC with Coal India; it is a tricky call because of the wage issues and the recent indications on E-auctions volume being tweaked?

A: Our portfolio stance is neutral to overweight on energy sector. At this price, we neither like Coal India nor ONGC . It is for a purpose of portfolio balancing, but we are negative on Coal India as well.

Q: What is your own sense of how the market steps into 2012 in terms of a working range or what parameters would you set for the Nifty now?

A: There are some big events to watch out for. It is important to see how the global economic growth scenario shapes up because if we do get any sovereign default followed by risk aversion, then we could see big money getting pulled out from emerging markets including India. This is one variable, which is very difficult to forecast.

Moreover, in India, we need to see the government beginning to take some actions before growth bottoms out. We may not see much downside for market. We have seen good rebound in the last few days, so we will not see too much of downside from here, but I don't see upside unless there is resolution in sight.