Upgrade Infosys to equal weight; mgmt view key: Envision

After erstwhile IT bellwether Infosys posted a better-than-expected Q1 result, Nilesh Shah, managing director and chief executive officer, Envision Capital expects the stock to rally about 8 to 10 percent.

However, he believes the management needs to change its commentary and do away with 'cautiously optmistic' view and become more optimistic.

"I believe there is going to be a trend changer only when that word 'cautiously' gets removed and they basically come out and say that they are optimistic about their prospects," adds Shah in an interview to CNBC-TV18.

Infosys today reported good set of numbers in the first quarter of financial year 2013-14 with the net profit falling lower-than-expected 0.8 percent quarter-on-quarter to Rs 2,374 crore. Its rupee revenue too increased higher-than-expected 7.8 percent Q-o-Q to Rs 11,267 crore from Rs 10,454 crore.

Additionally, Shah is recommending no to sell the stock. He says though the bias would be towards peers like HCL Tech and TCS, one should upgrade the stock from underweight to equal weight and wait a few quarters before taking a further call.

Below is the edited transcript of Shah's interview to CNBC-TV18.

Q: What are your quick thoughts on what Infosys has said this morning?

A: This is surely some kind of a sigh of relief for the market, because after many, many quarters we have clearly seen Infosys delivering on its guidance, particularly on the revenue side.

The fact that there is nothing really incrementally negative in terms of their numbers would clearly warrant an 8-10 percent upside on the stock, but I am not too sure whether this is going to be a breakaway quarter or not.

For that, the management commentary will have to change, because they still continue to be cautiously optimistic. I believe there is going to be a trend changer only when that word ‘cautiously’ gets removed and they basically come out and say that they are optimistic about their prospects.

Hence, I would probably say that it is a good quarter and it is going to provide a sigh of relief. However, I am not too sure whether it is yet good enough to ensure that the stock breaks away from the highs that it has made over the last few months or few quarters.

Q: Would you still keep Tata Consultancy Services (TCS) and HCL Tech as your top picks in the IT space or would you replace any of them with Infosys?

A: Not yet. I would probably still believe that the bias would be towards TCS and HCL Tech because they are providing a fair degree of visibility in terms of earnings growth . However, in case of Infosys, if one probably has been underweight, it is time to get equal weight and then wait for one or two more quarters to see how things are shaping up for them. It would then probably make a case for Infosys to trade at valuations which are at par with TCS. So, I would still believe that the case for discount is there. Maybe the discount will narrow, but I think over a period of time if there is one or two more quarters of consistency in terms of performance, then there would be a case for Infosys to play a catch up.