'Prefer Infosys, HCL Tech, Wipro in IT; -ve on TCS & TechM'

He prefers Infosys, HCL Tech and Wipro from the lot.

Below is the verbatim transcript of Ravi Menon’s interview to Latha Venkatesh, Anuj Singhal & Sonia Shenoy.

Sonia: There is nothing in Cognizant's press release that we don't know about. The slowdown in the sector as a whole, lower discretionary spending etc, but do you think there could be further negative rub-off impact on some of the listed IT companies in our market?

A: Not at all. The market has already factored in Infosys guidance cut. If anything, Cognizant's guidance cut is a slight positive in a sense that its macro environment, this has been something that they also hinted that it will be something that will blow out fairly soon. If you look at how much Cognizant has added headcount despite utilisation being low that indicates that their order book is pretty good. And they talked about how financial services clients are having some problems because the Fed was expected to hike rates and then because of the Brexit and related concerns, they didn't do that. So, they are struggling with net incomes that will be substantially lower this year and they are probably in terms of projections earlier. So, because of that financial service clients have been cutting back.

Latha: But at the moment what do you do? It is not as if we have got very flattering results from the Infosys' of the world either in India. With Cognizant as well showing some problems, will you see some more selling or will it be difficult to buy the Tata Consultancy Services (TCS) and the Infosys at these levels?

A: I have been negative on TCS for quite some time. Just because we think sustaining these margins is going to be difficult for them they are at the peak, substantially above the peer group and they have to sustain growth as well on a very large base - that has also begun on the peer group. We think that it is going to be difficult for TCS and we continue to be negative on it.

Infosys though we think they can improve margins. The contribution from platforms can help. We saw some of that this quarter. We thought that was largely ignored in the selloff. So, we think this is a good time to buy Infosys.

Anuj: So, what is the pecking order? Clearly it looks like Infosys looks like Infosys is among your top picks but we have numbers from all top five IT companies now. What would be your pecking order?

A: It is Infosys, HCL Tech and then Wipro and where we are still hoping for a turnaround when then as the vertical picks up, I know that oil prices have slid down further below USD 40/barrel but we should hopefully see that stabilise at some point. We have seen oil majors commit a large capex. So, we hope that if they have visibility of this thing bottoming out that should transfer into IT spending as well at some point. We continue to be negative on TCS and Tech Mahindra.

Anuj: So, do you expect both TCS and Tech Mahindra to deliver negative returns from here or maybe compared to Infosys and others they won't deliver as much. What is your overall expectation in terms of stock price move now?

A: TCS, we are expecting slight negative returns. Tech Mahindra, slightly negative again, close to flat, so we have a target of Rs 494 for Tech Mahindra.

Sonia: You have made a very interesting point stating that this Cognizant guidance cut may be looked at positively because it just signifies that it more of an industry issue rather than a company specific issue but the other question everyone is asking is are these demand challenges structural and long ending in nature or are they just cyclical. What is your view on that?

A: If you look at the world right now the developed world is not in a very good place and that obviously has an impact on completely export oriented industry like IT, but at the same time companies are facing this new technology shift and they have to spend to adapt to that. So, we think that spending will be moderate, but as and when the economy starts to at least start showing some signs of stability we have already seen that in the US. Cognizant this quarter revenue addition in the US was robust. As was across the board TCS, Infosys everybody's was good in the US. Europe was less though. Overall we think medium-term we remain positive on the sector.