Govind Agarwal of JM Financial has a positive bias on the IT sector. According to him, the largecap stocks in the IT sector can deliver about 20% returns on a one-year basis.
He indicated that TCS has been performing well. Moreover, he said, "The strength of TCS lies in execution of large deal." JM Financial has a buy rating on MindTree and eClerx is their top pick in midcap space. Below is the edited transcript of his interview to CNBC-TV18. Also watch the accompanying video. Q: There have been a bit of positives for the IT space. The rupee is one big positive, and now, the confidence among rupee bulls that it will go back to Rs 45 is receding. Some of the big and small IT sector companies have been reporting strong order wins. Is JM Financial positive on IT?
A: We have a positive bias on the IT sector. We are overweight on the sector as a house. As far as the sector is concerned, the largecap stocks can deliver about 20% returns on a one-year basis.
The result outperformance is driven by a combination of two factors. First is the demand in follow-up as much as it was expected in August and September. Second is the currency depreciation.
Both these factors have led to the recent outperformance and absolute returns in the past two-three months. Coming to the outlook, a lot will depend on the IT budgets for next year. IT budgets will decide the fate of these stocks over the next six months.
The companies indicated that the budgeting process is on time. The budget will be finalised by December-January timeframe. Directionally, they are positive. All the companies are indicating that budgets will be flat to up. There is no major pricing pressure.
If there is no major pricing pressure and we have a flat budget, Indian IT companies can report a revenue growth about 15% for next year. If it plays out in this scenario, there will be a big correction because of the macro risk. If budgets remain flat, the large cap stocks deliver about 20% returns on a one-year basis. Q: We have seen a few EPS upgrades taking place in some of the IT stocks. Given that rupee has depreciated even further and IT budgets are not so bad, are we likely to see further EPS upgrades in the second half of the year?
A: EPS upgrades will happen if rupee remains around Rs 50 plus levels. Currently, the street is factoring in about Rs 47-48 levels for next year. We are currently at Rs 47.5 levels for FY13. If rupee remains around Rs 50 level, we will see some upgrades coming during the next six months. Q: Would you go with the big boys like the Sensex and Nifty companies? What would be your top picks?
A: Within the IT sector, we preferred largecaps over the midcaps. Within the largecaps, our top picks are Infosys and TCS. We believe both these stocks can give about 15-20% returns over the next one-year. Infosys' underperformance of revenue growth in the last one or two quarters, largely because of some of the changes in the management, is now behind us.
The company is likely to report an improved growth in the next two quarters. The company is likely to surprise on the revenue and margin front in the next two quarters. We expect this stock to do well from current perspective.
TCS has been doing pretty well over the last few quarters. The strength of TCS lies in the execution of large deals. Their strategy of winning large deals and logging revenue will be very critical for their growth for FY13.
While we are looking at a slow growth environment, companies like TCS have logged in couple of good deals and its visibility on revenue side is pretty high. Infosys and TCS should do well on a one-year basis. Q: What is your call on two midcap IT companies
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