Negative on Wipro; exit now, says Ambit Cap

India's No. 3 software services provider Wipro has declared its second quarter results. Its consolidated net profit stands at Rs 1,610 crore verus Rs 1,580 crore on quarter-on-quarter (QoQ) basis.

In an interview to CNBC-TV18, Pramod Gubbi, vice president sales, Ambit Capital says Wipro's Q2 performance is largely in-line with estimates. However, he remains negative on Wipro and advises exit. Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Sonia Shenoy. Q: What is your view on Wipro’s Q2 results? What are you telling your clients to do? A: Wipro numbers are pretty much in-line, no surprises there. But I think the focus will remain on the restructuring and demerger of the consumer business. It’s seems to be a fair deal. Investors have enough options, if they want to retain holding in the consumer business, except for the fact that the consumer business will be an unlisted entity. That will leave out a lot of public market investors. I think the valuation is pretty much in-line. It’s also cleaner bet for investors. Nobody buys Wipro for its consumer business. So, it’s sort of a cleaner option, if investing in an IT story. Post the deal, we are recommending investors to take the cash option and also exit from Wipro shares. We have been highlighting that Wipro has been deteriorating in terms of competitiveness in the western world. Clearly, the results, over the last two years, have also indicated that. There hasn’t been any material change in that, neither do they have stepped up in terms of any specific vertical capabilities nor any service lines to gain market share. This is a time when industry is extremely competitive with Accenture and IBM picking. We have recently seen Infosys getting competitive on the pricing front. So, we would remain negative on Wipro, our recommendation is to exit. Take the cash as a part of this restructuring offer. Q: What about the market at 18,500 on the Sensex? What is the next path the market will take from here? A: We will continue to remain constructive on the market. Our target, for the next 12-18 months, is 23,000 on the Sensex. It will be driven by two clear drivers. One is continued reform momentum. We think New Delhi and particularly the finance ministry will go ahead with various sets of policy action over the next two-three months going into the winter session of parliament. FDI in insurance and banking amendment law should go through. There could be talks on the Land Acquisition Bill and Pension Bill being tabled, although they might hit some roadblock in terms of getting passed it to act. Secondly, this will help sentiment and take market higher, when most likely a QIP window will open. Primary issuances is what the economy needs in terms of money coming into the real economy. That is going to kick-start investment cycle. We did have some sort of a set back in terms of the RBI holding back on the rate cuts. It is more momentary. It is just a matter of time before the RBI executes on a rate cut. It wants to keep the surprise element. December is when it is going to initiate the rate cuts. That should add to the rally along with primary issuances, both equity and debt capital being available, investment cycle should pick up. That should drive the market closer to our target of 23,000 over the next 12-18 months. _PAGEBREAK_  Q: What are you telling your clients to do on the consumption facing names? This quarter there was a trace of disappointment in names like Hindustan Unilever, Bata, and VIP, but then Titan and Tata Global did very well post results? Are you buying anything there? A: Our stock pick there has been TTK Prestige. You are right in terms of the broader trends. We wouldn’t be disappointed by the sort of numbers displayed. But only in conjunction with the valuations, we’ve been highlighting it over the past two-three years, the shift towards quality and defensives. It got valued beyond justification irrespective of the steadiness, strength and growth, they delivered. When markets attention will shift towards other cyclical names, there will be some money shifting out of these sectors. That will put a pressure on the valuations and the ratings, irrespective of how steadily they deliver the numbers. But, within that, we see pockets where there is strength and valuation attractiveness, particularly TTK Prestige had a poor quarter in Q2. That is an opportunity for investors to get into this name at relatively reasonable valuations. Titan had given a similar opportunity in June, when they reported poor numbers. But unfortunately, it has rallied too much and also the expectations from the management have been quite strong going into the festive season. That is the case with most of the consumption names. Other than the mainstream FMCGs, especially in the durable space, we have seen the auto numbers coming through. For passenger cars and two wheelers, there is a pick up in demand. It’s going to be a good festive season for more consumption names, but the underlying theme would be valuation. Can you still justify the valuations of even Hindustan Unilever at this stage? We will have to look for pockets where companies have beaten down on aberrations and are giving you an attractive entry point. Our bet would be TTK Prestige. Q: In your argument of a bigger upside for the market, what role will midcaps play? Which are the attractive stocks in the broader market? A: The theme would be pretty much the same. We are looking for quality. But, at the same time, we are looking for cyclicality in the business; names that have been depressed because of prolonged economic slowdown. If we see capital coming back into the economy and lower interest rates, clearly a lot of these cyclical names are going to benefit both operationally and financially. So, we would be looking for characteristics of that sort. We would pick up sectors like infrastructure, construction, capital goods, some of the auto names as well as specific quality financial names. Within construction and infra, we have been highlighting Voltas. Blue Star will be negative, but the stock has sort of bottomed out. Those two pockets are quite interesting to look at. Sadbhav Engineering is another midcap name that will benefit with the recovery. That is from the engineering and construction pack that we will be looking. Autos, while Balkrishna is not really geared to the Indian economy, it’s more an expert driven stock. We like it from the midcap space and so is Apollo Tyres, another name which is finally got a clean chit. The overhang of the Competition Commission is away now. The focus should be on fundamentals which should again benefit from recovery in underlying auto sales.