IT demand environment mixed; TCS target at Rs1800: Religare

TCS, Infosys, Tech Mahindra are Religare’s top three bets from the IT sector. TCS exceeded street estimates with a stellar set of April-June quarter earnings. The broking firm has raised TCS target price to Rs 1800.

IT analyst Rumit Dugar said that one can look to play these companies using a three-pronged strategy. “Play execution through TCS, demand recovery through Infosys and use a bottom-up approach to play Tech Mahindra and Mahindra Satyam, he added.

The demand environment for the IT companies is mixed therefore, some midcaps have delivered good growth while for others it has been muted, he added.

Also read: Deal pipeline strong; see stable Q2FY14: TCS

Below is the verbatim transcript of his interview on CNBC-TV18

Q: What is your estimate in terms of how much Tata Consultancy Services (TCS) could move from here after the stellar set of numbers that the company posted?

A: TCS reported a very strong set of numbers. Volume growth was over 6 percent and growth in international business was almost 8 percent.

On one hand, where you have a mixed kind of a demand environment, we have seen numbers from IBM, Accenture their bookings have been good but revenue growth has not been that great.

Companies that are executing well should continue to get the premium and TCS has shown excellent execution. We have raised our target price to Rs 1,800 and we believe that within the largecap technology space, TCS is one of the best ways to play the execution story.

Q: If you are expanding TCS by such a huge margin, would you give more points to other IT companies simply because the operating environment appears to be better than what the street was prepared for going by the results reported so far?

A: If you see the demand environment, it is not even across the board. So there are few companies within a midcap space, which have delivered well in this quarter whereas few other have seen muted growth. So the environment is mix.

Therefore those companies that are able to deliver growth at the upper end of the industry band, and the rupee tailwind continues for most of them; so those companies, which have the combination of these two will see the price to earnings (PE) expansion and earning upgrade.

So, to that extent you have to see which companies are going to display these two characteristics.

Q: Would Mindtree and Hexaware Technologies be among those stocks that you would upgrade, their numbers have come in reasonably stronger than at least what the street was thinking?

A: Yes, Mindtree numbers have been pretty good. Obviously they are going to have a nice tailwind on the rupee in the next quarter.

For Hexaware Technologies, while this quarter numbers were at 1 percent, the guidance for the next quarter is pretty decent at 3.5-5.5 percent. The challenge for Hexaware in particular has been that they had a client specific issue a couple of quarters back and they have been recovering from that. On a full year basis, the growth might not be at the industry average but on a run rate basis, you are going to see a recovery in Hexaware.

So yes, these two stocks would probably fall in that category.

Q: The fear now perhaps is the fact that TCS may start to become a very crowded trade because of the excellent set of numbers, the buy recommendations etc and the valuations which are so steep also make you a tad bit uncomfortable to expect too much of an upside from here? Do you buy that argument and how would HCL Technologies be placed against TCS now, which one would you pick out of the two?

A: On the valuation front, TCS has been trading at a premium to the peer group. However, we need to put this in context with the kind of delivery and execution that we have seen from TCS over the past two-three years, which has been extremely good and ahead of the industry and that would continue to command a significant premium to the industry.

Even HCL Technologies has been executing reasonably well particularly driven by infrastructure services.

Our strategy for the technology space has been to play a three-pronged strategy. One is you play execution through TCS. Two, on the demand recovery, you play it through Infosys and three, on a bottom-up basis, we like Tech Mahindra and Mahindra Satyam. These are the three top buys from our perspective in the technology space.