Oct 15, 2010, 12.41 PM IST | Source: CNBC-TV18

IDFC sees 20% return from Infy in next 6 months

Pathik Gandotra, IDFC Securities is bullish on Infosys. In an interview to CNBC-TV18, he said, Its Rs 155 earning for next year. It can easily quote north of 22 times for that. In the most optimistic case 25 times of that number which would be about Rs 3,700-3,800."

Pathik Gandotra, IDFC Securities

Most experts are busy crunching Infosys ' numbers, while many of them have already upgraded it on their radar.

Pathik Gandotra, IDFC Securities is bullish on Infosys. In an interview to CNBC-TV18, he said, Its Rs 155 earning for next year. It can easily quote north of 22 times for that. In the most optimistic case 25 times of that number which would be about Rs 3,700-3,800. Thats the most optimistic forecast that one can have on Infosys. I am not counting the fact that it can get upgraded as well. A 20% return from hereon in the next six months, I dont think is very exuberant."

According to Gandotra, the strong set of Infosys numbers are a testimony to the fact that India is a market which is not expensive and viewed in conjunction with earnings growth and this is the biggest positive from the results that have come out so far.

However, there the risk is that if liquidity tightens which can possibly happen in March, there might be a correction.

Below is a verbatim transcript of Gandotras interview on CNBC-TV18. Also watch the accompanying videos.

Q: What have you made of Infosys results and the way the market has reacted to it?

A: The results are very good. We were expecting 8% quarter-on-quarter growth in US dollar revenue terms but its come to 10% QoQ and thats the biggest surprise. Our thesis on the IT sector has been that revenue growth is going to be extremely strong from hereon for this year and even for next year, which is why we been very bullish on the sector from quite sometime.

There has been a build-up to the result where the stock has moved up in anticipation and thats why its like sell on news but by no means have I taken that as a statement that the earnings are in the price. What is not in the price is this earnings growth will continue for the next few quarters as well.

What will happen is post the result season or in a month or 45 days from now, you will again start seeing a build-up in these stocks on expectation of December earnings.

These strong numbers are a testimony to the fact that India is a market which is not expensive and viewed in conjunction with earnings growth and this is the biggest positive from the results that have come out so far.

Q: Do you think Infosys will continue to beat estimates over the next two-four quarters as well, like it has done in the current quarter?

A: We have done some analysis of a typical upgrade cycle and we have looked at IT earnings cycle for the last eight-10 years. A typical upgrade cycle lasts about 10-11 quarters, thats typically what happens. You are still mid-way there. You had a hiccup last quarter because of unexpected rise in operating expenses, wage hikes, wage costs that Infosys took, but I guess thats fine. We think there are at least a few more quarters to go before the upgrade cycle itself ends.

Q: What kind of price can you justify for Infosys, six months down the line, given your expectations of how FY12 numbers would be?

A: We have the current numbers and my analysts are still working on them. Its Rs 155 earning for next year. It can easily quote north of 22 times for that. In the most optimistic case 25 times of that number which would be about Rs 3,700-3,800. Thats the most optimistic forecast that one can have on Infosys. I am not counting the fact that it can get upgraded as well. A 20% return from hereon in the next six months, I dont think is very exuberant.

Q: What about the market, are you feeling any vertigo at 6,200 Nifty or 20,500 Sensex or do you think we can just continue with the trend?

A: I am not feeling any vertigo whatsoever. I think we can continue with the trend for at least four-five months. The biggest risk is if liquidity tightens which can possibly happen in March, you might see a correction but otherwise we are good.

Earnings in India is doing extremely well, the entire impact to the rate hike has not yet translated into the real sectors so your interest rates are still very moderate. So, strong earnings, moderate interest rates and a market which is not very expensive, it is trading at 16-16.5 times to FY12 earnings which is nowhere near the valuation that it was trading at when it hit the same number last time. It was trading at about 21-22 times one year forward.

You are still 25% away from the top. You are trading at close to mid-cycle multiples, not counting the fact that earnings can still be upgraded. We are actually very bullish and even if it corrects, it will correct for sometime, then you can again resume your journey northward.

Q: We have seen three days of earnings and a lot of the financial numbers have been pretty good - Axis Bank , IndusInd Bank and LIC Housing .  Are you are okay with what you saw for the private sector financials?

A: Absolutely, the numbers were slightly ahead of what we thought but not materially ahead. You had 4-5% more on these numbers but if I look at the mix of numbers, the margin profile of banks for this quarter is surprisingly on the positive.

At least IndusInd Bank and Axis Bank, both surprised positively on their margins, which is a very healthy trend for numbers. Stocks have already moved up before the numbers and which is why it must have been just sell on news, but the numbers are strong and I expect the numbers to be stronger at least in the next quarter.

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