After dismal Infy Q2 results, will other IT cos click?

In an interview to CNBC-TV18, Ankur Rudra of Ambit Capital shared his outlook and strategies on various IT stocks post Infosys’ disappointing performance on Friday. Ambit Capital continues to have a negative outlook on Infosys. "It is one of our top sells. We have got 11 percent downside on Infosys," he said.

Amongst others, HCL Tech is likely to post a sequential dollar revenue growth of about 6.1 percent. "From overall IT, my top pick in the largecap would be HCL Technologies, we see around 10 percent upside from there," he added.

TCS may register 4.1 percent dollar revenue growth and about 24 bps margin expansion. "We expect 71.4 for full year on TCS and our target price is Rs 1,374. This remains a company which continues to execute quite strongly. It continues to grow ahead of most of their offshore pure play peers," he explained.

Below is the edited transcript of Rudra’s interview with CNBC-TV18.

Q: How would you approach Infosys?

A: We continue to remain negative on Infosys. We think the challenges for the company continue to remain in meeting the current guidance. This is because the current guidance remains relatively aggressive at about 3.7 percent compounded quarterly growth rate (CQGR) for the next two quarters. We understand that the company has got a bit more confidence on recent deals won, but history doesn’t suggest that stronger growth is likely to happen in second half.

Q: What kind of an earnings per share (EPS) are you looking at for the yearend for Infosys and therefore what valuations will you given it, what is your price target?

A: Our current EPS is 162 and our price target is Rs 2,153, so that implies approximately 13 times FY13. There are challenges to this EPS target also particularly, as dilution from Lodestone comes about. So, even the guided target of Rs 160 could see some downward pressure.

Q: What abut HCL Technologies and TCS? Both these companies come out with earnings this week, how would you be pegged on expectations?

A: On HCL Tech, we are at the upper end of the revenue growth expectations. We are expecting the firm to grow at about 6.1 percent sequential dollar revenue growth. However, we expect a margin contraction of 294 bps, slightly ahead of the street because we are expecting them to increase their selling, general and administrative expenses (SG&A) spending compared to before. We are slightly ahead on earnings expectations for the quarter. On TCS we are inline more than we are on HCL. For TCS we are expecting 4.1 percent dollar revenue growth and about 24 bps margin expansion.

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Q: Can you elaborate a bit more in terms of the earnings expectations for both these companies and what kind of valuations you are ready to give TCS now?

A: We expect 71.4 for full year on TCS and our target price is Rs 1,374. We are happy with about 18 times one year forward. This remains a company, which continues to execute quite strongly. It continues to grow ahead of most of their offshore pure play peers. We are comfortable with that kind of valuation.

Q: Couple of midcaps announcing numbers tomorrow like MindTree and NIIT, any of these numbers that you can offhand tell us. You track those companies, don’t you?

A: I do not cover MindTree and NIIT, but I do track them.

Q: Do you expect them to render a positive surprise, MindTree in particular?

A: MindTree has been expecting relatively strong growth for this quarter, a lot of their business is driven by the IT services part of the business. That should deliver relatively strong numbers. However what remains a challenge for the firm is about 40 percent of the business from product engineering service. What we will keep watching out is whether that keeps dragging the firm down for the full year expectations.

Q: How would you be placed on something like Wipro and what your expectations are from that?

A: We are expecting Wipro to grow revenues at the upper end of the guidance as 2.3 percent for the quarter. However, we do not see an improvement in organic performance in the quarters coming ahead.

For the full year, we do not expect them to grow north of 5-5.5 percent on the dollar revenue basis. We remain bears on Wipro, our price target is Rs 305, so we have got a quite a strong downside from here.

Q: You were going to give us what your thoughts are of NIIT Ltd as well and in the process what are your top buys and maybe even sells in the IT space?

A: I do not cover NIIT, but I expect reasonably in line numbers from them. Overall IT my top pick in the largecap would be HCL Technologies, we see around 10 percent upside from there. Outside of that our top sells are Wipro followed by Infosys.

We have got 11 percent downside on Infosys and around 20 percent downside on Wipro. In the broader space including beyond IT services we also like Infoedge and Redington, these are leaders in the niche verticals we play in.