IT sector to bottom out; to watch TCS guidance on BFSI: Experts

Govind prefers Infosys over TCS and Sandip too thinks Infosys has an edge over TCS on one-two verticals like fixed price projects, attrition levels and says it is time to start buying into IT because the sector is close to a bottom now.Below is the transcript of Sandip Agarwal and Govind Agarwal’s interview to Latha Venkatesh, Anuj Singhal and Sonia Shenoy on CNBC-TV18. Latha: What are you expecting in terms of Tata Consultancy Services (TCS) numbers? Are you preparing for a guidance that they will underperform their margins guidance of 26-28 percent? S Agarwal: TCS growth will once again be muted. Just to recall, TCS has very high dependency on first half of the year and particularly, Q2. Now, given that they have already warned on the Banking, Financial services and Insurance (BFSI) growth which is a huge dependency again for them, the margin expansion which should have been in the range of 120-130 basis points, quarter-on-quarter (Q-o-Q) because there is no wage hike, there is no visa cost impact does not look like that kind of benefit will flow. So, from last quarter’s 25.1, we are seeing 25.7 in this quarter and since second half is always weaker for TCS, the margin expansion is limited. So, in my view, the chances of 26-28 percent range, they not being able to meet that range, it looks very high this year. Having said so, if you see the one thing which we are broadly missing is the kind of impact which the whole sector has gone through because of cross currency impact. That is almost like 400 basis points this year which is very high. In FY16 it was 400 basis points and this year we do not know where it will end. So, in my view, that is actually taking down the growth and obviously, some impact of that is in the margins. In my view, TCS will have one or two more tough quarters going ahead, but I do not see significant downside risk from here although we have a hold rating, I maintain that view. We will see what happens in the result. Key thing will be what is their commentary on the BFSI because that is a very huge area where growth of India IT depends. Sonia: What is your own view given that this quarter is expected to be muted? Do you think that a lot of bad news is in the price or would you expect more downside? G Agarwal: For the sector as a whole, over the bad news is in the price to a large extent. We will see in the current quarter a lot of bad news coming through in terms of even the impact of Brexit. The management commentary on the impact of Brexit on the financial services sector in particular. And also, the uncertainty on the US elections will also be behind us by the time we end the quarter. So, my view is that we expect the sector to bottom out in the current quarter, both Infosys and TCS and within the two names, we prefer Infosys over TCS. Anuj: Over the last three months or so, the TCS premium is back over Infosys and the consensus is that that should again recede. Have we seen the start of that over the last couple of days that there is some bit of money shifting from TCS to Infosys? And larger question then, would you expect Infosys to outperform from here? S Agarwal: Infosys will outperform TCS, that has been our view for the last almost 2.5 years and if you see the returns also, it has come out in that fashion. In my view, this will continue and there is a very fundamental reason for that to happen because if you see, we see any company on three fundamental parameters. One, the exposure of their services and verticals where they are exposed to. Second we see if they have acquired any skill set recently which are aligned with future technologies, we see the margin matrices. And if you see a very detailed analysis on all those three parameters, you will find that Infosys has an edge over TCS in terms of at least one or two verticals are not in that bad global situation similar to TCS which gives Infosys an edge of 2-3 percent in terms of revenue growth. And similarly, on the margin side, in case of Infosys, there is a huge margin lever which is there. For instance, their fixed priced projects are still much lower than any other player in the sector and that gives them the leverage to automate faster. A move towards more automation and move towards more fixed priced projects which are always margin accretive. Second, if you see again, their attrition obviously, last quarter has come up very sharply, but broadly, their attrition has a tendency of going down. So, that is also another big positive. Thirdly, utilisation still has some scope for improvement. So, if you take all those things into account, TCS does not have a high chance of improving their margins above 26-26.5 percent, but Infosys can improve its margin by 2-3 percent over the next two years. On revenue growth front also, it can beat TCS by 1-2 percent. And even on the multiple side, Infosys is at a 10-15 percent discount. So, if you put all three things together, Infosys definitely has a much higher chance of outperforming TCS. Latha: What would be the one thing you would watch out for from the management today? G Agarwal: The one thing to watch out will be the commentary and the outlook on the financial services vertical and how it is panning out for the next year even though it is too early to look for next year outlook. Sonia: You did give your argument on Infosys versus TCS, but what about the sector as a whole because the question that we get asked very often is when is a good time to buy into these stocks? Do you think post earnings is a good time to buy into Infosys and TCS? S Agarwal: The whole sector is almost 95 percent of the bad news is already in the prices. We are close to a point where we should start buying again the stocks. I believe that as we near US elections, we will be almost at the bottom of the sector and from here, only one caveat which I would like to give is, we do not have any big idea on what happens to cross currencies like Euro and GBP and that is the only risk to growth. Otherwise, we do not see any fundamental risk to numbers in the sector. So, we are close to bottom, I would say. So probably, in this quarter earnings or sometime you should start again buying the stocks.