TCS, Wipro, Mindtree: Who will steal the show in Q2?

In an interview to CNBC-TV18 Ankur Rudra, VP-Institutional Equities at Ambit Capital shared his reading and outlook on various stocks across the IT sector.

Technology giant Tata Consultancy Service (TCS) will announce its second quarter earnings today. According to the CNBC-TV18’s estimates, the company’s Q2FY13 USD revenues are seen up 4.2% at USD 2,842 million versus USD 2728 million. Its rupee revenues are seen up 4.6% at Rs 15,555 crore versus Rs 14868.7 crore. Rudra expects TCS to post industry leading volume growth of about 5%. “We do expect industry leading volume growth among the largecap peers about 5 percent. They will set the standard for this quarter as well,” he said. The brokering firm has a target price of Rs 1,374 on TCS. Further, he expects HCL Tech to outperform its Tier one peers. "The positive was the margin outperformance and how the company has been able to expand margins by moving into high quality and larger customers," he added. According to Rudra, HCL Tech has fair chances for rerating based on its strong performance. Below is the edited transcript of Rudra’s interview with CNBC-TV18. Q: What do you expect to see from TCS, industry leading volume growth or a bit more sedate? A: We do expect industry leading volume growth among the largecap peers about 5 percent. They will set the standard for this quarter as well. Q: What kind of dollar revenue growth are you expecting, more than 4 percent? A: We are a bit more conservative. There will be a bit of a mix change leading close to 1 percent realization correction. So, it will be 4.1 percent. Q: Do you see upside to the stock because it’s already trading at a significant premium to some of its large peers. Can the stock still move higher from Rs 1,300? A: The stock seems to be priced for perfect execution. Our target price is Rs 1,374, so we see just a 5 percent upside. Any movement up from here would need them to substantially outperform on the current volume growth projections for this quarter and for FY13. Q: What did you take away from HCL Tech’s numbers? The numbers seems to be good but the stock has not run away post results? A: The numbers were positive and there were few negative surprises as well. The positive was the margin outperformance and how the company has been able to expand margins by moving into high quality and larger customers. The negative surprise came from relatively muted dollar revenue growth, despite the fact that volume growth was reasonable at 4.5 percent. Given that, one expects HCL to grow at a relatively faster pace than its tier one peers. That’s one of the reasons why the stock performance has not reflected. HCL Tech remains a clear candidate for rerating as strong performance sustains going forward. Q: You think HCL Tech some time in the next two-three quarters might trade at the valuations that Infosys commands? A: We would think so. Given Infosys is underperforming substantially and consistently so, HCL deserves to trade at a closer valuation range to Infosys than it has in the past. _PAGEBREAK_ Q: What is your call on Infosys, are you a contrarian buyer or would you still sit out and watch for a while? A: We have been sellers on Infosys over the last year and a half or so. Although we see few signs of change in terms of management has articulated a change in strategy and they are accepting of the fact that they need to be a bit more flexible in the current market. We do not see that translating to substantial increase in their wins on the ground. For the moment, we sit comfortable with our sell call in Infosys. Our target price is on the lower side. We are at Rs 2,150. Q: What about Wipro? Do you see that continue to underperform? A: For this quarter, the result should be fairly inline. We are at the higher end of the guidance. The guidance was about 0.3 percent to 2.3 percent dollar revenue growth. They should be able to perform there. The main challenge for Wipro is when it gets back to the industry levels of growth. We do not see that happening either by the end of FY13 or in FY14. The challenges that are there, lack of strong vertical presence or a lack of a unique service line offering, that some of its peers have and also a relative weak sales engine both from account mining and new business development perspective, continue to undermine their performance in a relatively competitive market. Q: What about the midcaps, you have seen MindTree for the current quarter which wasn’t exactly encouraging but of the basket that you track in the midcap IT space which ones can turn and surprise this quarter? A: In the midcap results, we have seen two instances of guidance being cut off, MindTree was one of them and the other was Infotech. One result that stood out so far was Persistent Systems, they posted very strong numbers at about 9 percent dollar revenue growth, they saw a strong margin performance as well. That’s our pick at the moment. We also cover eClerx Services that’s also reporting post market today. The results will be relatively inline about 6 percent dollar revenue growth. But, we do not particularly like the fact that it is highly leveraged to offshore and hence as the rupee strengthens up its margins will be under pressure than its peers. Q: Persistent Systems has already reacted with an 8 percent upmove this morning, from that current price of around Rs 436 odd how much upside can you justify on the valuation front? A: Persistent Systems is just reacting to earnings upgrades. A 5-10 percent earnings upgrade is justified on their strong performance. Persistent Systems continues to trade at the lower end of the teens, just below the leading midcap peers such as Hexaware. Given the relatively stronger performance and stronger RoE the thing with Persistent Systems is it’s got a relatively unique and niche business model, a leadership in offshore product development. It has continued to perform well in the phase of relatively weak performance by peers such as MindTree in the segment. It deserves a bit of a premium over its midcap peers. Another 10-15 percent from a one year perspective is relatively fair expectation from the stock. Q: Do you think this will be a subdued quarter for telecom stocks? A: Second quarter tends to be seasonally weak for all telecom stocks for various reasons. As a result of that revenue performance should be weak. Their subscriber additions have been fairly weak; in fact we have seen a decline for the first time for two-three successive months. A part of this was because of deactivation of inactive subs, we also think that will play to some extent on the reported topline numbers. Given relatively high leverage on the EBIT or more importantly on the PAT side, numbers for this quarter should be relatively muted.