Infy pricing fall hints at pressure on IT sector: Edelweiss

Even as IT major Infosys disappointed the street with its earnings, Nischal Maheshwari of Edelweiss Securities is of the opinion that the company’s increase in volume in US, Europe as well as domestic markets has been encouraging. However, the decline in pricing has come in as a surprise which indicates some amount of pressure.

Furthermore, Maheshwari feels that the market had anticipated a lot more in terms of the buyback of shares, which Infosys failed to deliver. Below is the edited transcript of Maheshwari's interview with CNBC-TV18. Q: What did you make of all the qualitative statements from the management? How cautious would you be going forward? A: For the current quarter, there is some amount of disappointment. But I think the volume increase which they have shown especially on the US front and the domestic front is pretty encouraging. Again on the European front, if you take out the 15 million cut which they have taken, you would see quarter on quarter volume increase. Overall, around 2.8% volume increase is pretty good. A bit of surprise has been on pricing decline. We have not been able to get an answer to that because that clearly shows that there is some amount of pressure. Otherwise, there was much more expectation as far as buyback was concerned in the market. I think that has disappointed the market quite a bit. And we have seen stock down by around 9-10%. Q: The IIP number revised lower for April, then came in okay for May. Does it change your growth or revenue numbers, your EPS expectations for the current quarter or is it just one of those numbers that you can at the moment ignore? A: Yes, it is just one of the numbers basically at the moment which you are just looking at it. It doesn’t change anything for the current quarter obviously. Even if there are some policy changes which gets announced post the presidential election, the transmission will take at least 2-3 quarters to manifest itself with the numbers. Definitely, we are not seeing any changes as far as the outlook on the numbers is concerned. What is interesting is that in the last two recessions in the last 10 years, the corporates start realizing that the economy is not growing at the same pace what they had anticipated. In this case, may be most of the corporates are looking at around 8-9% kind of GDP growth, and here, we are between 6-7%, they start cutting down their expenses. So they are just readjusting to your OPEX now. So they will cut down their employee costs, cut down the benches, expenses as we have seen for the last 2-3 quarters, advertisement expenses have been down. This year, surprisingly, the depreciation has been pretty down. If you look at BSE 100 and what you see in this kind of scenario though your top line will be falling, bottom-line starts to plateau out or start improving in couple of quarters time. So this actually creates a bottom for the market as far as the earnings are concerned. Q: What are you working with in terms of an earnings growth? Do you have a quarterly number? What is your yearly number in terms of earnings growth and which quarter do you see things bottoming out as far as earnings is concerned? A: If you really look at in the last 2-3 quarters, the top line has shown degrowth on a year on year basis from 27% to last quarter of 18%, this quarter I believe it will go down to anywhere between 15-16%. The PBT, at around 14.8-14.9%, has been flat for the last three quarters. So that has already started getting manifested where people have started cutting down their expenses. _PAGEBREAK_ The interest rate scenario will also start playing out along with the cost of commodities. Though the commodities have been down internationally, but because of depreciated rupee, the impact is not showing in the P&L of the companies. So if these two things also play out, I believe you will start seeing improvement in profitability on a PBT margin in the next two quarters itself. Q: For this earning season, in particular, has there been surprise broader market picks in terms of possible upside in earnings, and consequently, negative surprises as well? A: Surprises are not many because the expectations are very low in the market. On the upside, may be few banks may surprise you especially on the private side. Disappointments will once again come on the PSU bank side. I think market is not really factoring in that the problem on the asset quality has now gone down to the SME level. I have been speaking to a lot of banks and this time the numbers what people are anticipating on the restructured book as well as the NPL numbers will be much higher. I think SBI after last quarter’s guidance anyway increased that guidance on the NPL level. Q: You have been overweight on several sectors. Can you drill them down to stocks? Which stocks do you think will start showing an improved PBT growth? Therefore, what would you start tanking up right away? A: Actually several sectors are also valuation plays actually something like Bharti Airtel. So we are overweight on telecom and I believe that Bharti would be the last one standing whatever be the outcome of the telecom spectrum pricing be. So that’s why we prefer some telecom overweight in a Bharti there. In case of energy where we are overweight, we are largely banking on the oil prices have come down and partially the price increases has been put through as far as petrol is concerned. We are hopeful that post the presidential election, some increase may happen in diesel prices. Therefore, we are overweight on BPCL because of their upstream discoveries. Today, they announced that they have made a discovery in Brazil. So BPCL is what we like as far as oil and gas is concerned. Again on the real estate side I want to play the interest rate and I am positive on DLF. Q: I understand you are retaining an overweight on autos as well? A: Yes, we are retaining an overweight stance on autos. In case of autos, valuation is in our favor. We believe that interest rates should be aggressively cut in the economy. So expectations of interest rate cut, valuations and third thing is the commodity cycle is still not played out as yet. So as the rupee stabilizes around Rs 53-54, I think that play also will start giving positive results to the autos, which is why we are favoring autos.