Expect TCS to post 4% volume growth: Prabhudas Lilladher

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Shashi Bhusan, IT analyst at Prabhudas Lilladher expects IT major, TCS to post 4% volume growth in the third quarter. 

In an interview to CNBC-TV18, Bhusan said, "In dollar terms, we are expecting 2.7% quarter on quarter growth with a margin expansion of around 210 bps. On the bottomline we are expecting 17% quarter on quarter growth in rupee terms."

HCL Technologies reported better-than-expected profit growth for the second quarter. Its net profit for the Oct-Dec quarter jumped 43.3% from a year ago to Rs 572.7 crore.

Bhushan expects HCL's second half to be better than consensus expectations. "But the key positive which came out of the result is, in a seasonally weak quarter they have signed 57 new clients," he added.

Prabhudas Lilladher has a target price of Rs 530 on HCL Tech.

Amongst the midcaps IT stocks, MindTree and Polaris are Bhushan's top picks.  

Below is the edited transcript of Bhusan's interview with Udayan Mukherjee and Mitali Mukherjee of CNBC-TV18. Also watch the accompanying video.

Q: What is your initial reaction on HCL Technologies numbers?

A: The topline was inline with expectation, but margin expansion was slightly ahead of what the consensus was. Overall, it was marginal positive in terms of operational performance. But the key positive which came out of the result is in a seasonally weak quarter they have signed 57 new clients. Also, their onsite volume went up 5.7% quarter on quarter, which indicates that the second half is going to be better than what consensus might be factoring in at this point of time.

Q: Would you say qualitatively these numbers are better than what you saw from Infosys?

A: Yes, in case of Infosys it was largely very client specific issue which resulted in disappointment. If you look at IT services companies, they have been reporting decent set of numbers. So, I would say demand is tapering down a bit from what we have seen maybe six-seven quarter back. It was 8-9% quarter on quarter growth and it is now to 4-5% growth on a seasonably adjusted basis, but definitely it is not turning out to be a muted to what Infosys has guided.

Q: Because of what you have seen though on blended and on onsite volume growth for HCL Tech, how much would you mark up revenue expectations by and what is your price target on the stock now?

A: We have a target price of Rs 530. We will wait for the management commentary to get more insight on what the numbers are and exactly what is going into that calculation to change our estimate. But what consensus might be factoring in at this point of time is sort of 3-4% kind of volume growth for onsite.

Q: What are you expecting from TCS this evening?

A: We are expecting volume growth of 4%, in dollar terms we are expecting 2.7% quarter on quarter growth with a margin expansion of around 210 bps. On the bottomline we are expecting 17% quarter on quarter growth in rupee terms.

Q: There has been a lot talk about how Wipro maybe the dark horse this time both in terms of the facts that vertical have begun to improve and they have very strong faces joining their team. What is the call on Wipro?

A: The structuring will start giving them good growth. How much of that will translate into this quarter is the thing to watch out for. My sense is that all those changes which they have made in the business hierarchy and restructuring will definitely be positive. Going forward things are going to turnout positive for Wipro. But in this quarter how much of that will be translated we have to see that because they are still not through with the whole restructuring process, a little bit on middle management is still going on.

Q: Do you track any of the smaller names, what is your top pick from midcap IT bunch right now?

A: In midcaps, we have MindTree and Polaris as our top pick. MindTree would report some positive surprise in the PE space because some of IP sales and that will provide some impetus to the margin. They have now refocused their business fairly and they now focus more on the core segment where they operate. So, with the focus on core segment where they operate along with the margin, the company looks much better place to reap the benefit of their brand equity.

Q: Do you think Infosys despite the post result shock is supported around Rs 2,600 kind of levels or do you see lower levels where it settles?

A: Its very client specific stock. If they lose out on couple of contracts from their existing client and things start looking even worse from this level the stock can touch new low. They are very margin conscious and that is what is getting reflected in the numbers as well.

My sense is that if they lose out on couple of top ten client maybe even smaller projects then the stock can inch downward as well. From an overall business perspective, they intend to move up the value chain may not get translated maybe in the next quarter. But definitely when things start turning around for the IT sector as a whole, the business composition will move in a way where their growth could be in a top quartile.