Murthy's return positive; HCL Tech top bet from IT: Citi

Surendra Goyal, director & head of Research, Citi India expects a pickup in earnings growth for India Inc going ahead. Analysts are forecasting 12-13 percent earnings growth, he told CNBC-TV18.

Commenting on the IT sector, Goyal says, Narayana Murthy's return is a positive for Infosys though investors are in a wait and watch mode. He feels Murthy's has played a big role in setting up Infosys in the initial years and is an acknowledgement of some kind of problem. Also, Murthy has always been very good with articulation and communication and he says should help. Also Read: IT cos set to get a rupee depreciation boost in Q1
Meanwhile, HCL Tech continues to be Goyal's top pick from the IT space for the past three years. "It is a company with solid execution. Over the last 10-12 quarters, they have continuously been doing well. The stock does look attractive at 13 times FY14," he adds.
Shifting focus to media sector, Goyal says digitisation has been a game-changer. He is bullish on Dish TV and DB Corp. However, he recommends selling Zee as he feels the positives have already been priced in. Below is the verbatim transcript of Surendra Goyal's interview on CNBC-TV18 Q: Give us the key takeaways of the interactions that you had with corporate India. There is so much pain over the way rupee has moved and the impact it would have on the balance sheets of many of these companies. What have you been hearing?
A: In Q4 the aggregate Sensex ex-oil earnings was just about mid single digits. Firstly, they were slightly better than what analysts were expecting and the growth was quite tepid at around 5 percent or so. So it can be interpreted both ways. The key is going forward, in the next couple of years we have analysts forecasting 12-13 percent earnings growth. So, we are forecasting some pick up as far as overall earnings are concerned.
In terms of the conference, these are interesting times given that the market has practically done nothing this year. But at the same time lot of emerging market portfolio managers are saying that India looks interesting because it is commodity consumer and commodity prices are falling. According to our economists and strategist, a lot of people are looking at India closely. People will be looking at demand, margins and all those trends very closely going forward. Q: There is a notion that when rupee depreciates, many of these IT companies will have a positive impact, but in the past whenever the rupee has depreciated margins have not really improved. Should the street or investors really get excited about the rupee depreciation and the impact it would have on IT companies?
A: There are two points here. Firstly, rupee is not very influential as far as stocks are concerned. If you look at data for the last 10 years the sector has done well when demand trends have been good and that happened multiple times when the rupee was appreciating. It is interesting because most people correlate IT stock performance with rupee depreciation and the second thing is a brief depreciation, over three months it depreciates very sharply and does not help much. So if that’s the direction, it is depreciating over a long period and that is what tends to benefit these companies.
Thirdly, larger companies have not benefited much and clearly there have been some pressures on pricing. The business has been a little tough and that has taken away some of the benefits which should have come into the margins and have not really flown through. For some companies like HCL Tech or MindTree, we have seen the benefits flowing through to earnings.
_PAGEBREAK_ Q: How significant is Narayana Murthy's return for Infosys? Is that return priced in?
A: Infosys stock is maybe 2-3 percent up which is not really much. There are two ways to look at it. Firstly, it is a positive that Murthy is back because he has played a big role in setting up the company in the initial years and is acknowledgement of some kind of problem. Secondly, the good thing is Murthy has always been very good with articulation and communication and that should really help.
Infosys 3.0 or if there are any changes, that gets communicated to the staff in a very clear manner and then the focus will be totally on execution. So I think it is a positive. Most investors will take a wait and watch kind of approach given that things have been tough, the market has changed and so people are not very certain how it plays out. There is nothing to get carried away really. You wait and watch for next four quarters and trends become clearer. At the margin we believe it is a positive. Q: Do Tata Consultancy Services (TCS) have valuation headroom? When do you see a turnaround on Wipro? With respect to HCL Tech, do you expect the momentum to continue?
A: On TCS we are neutral right now primarily around valuation concerns. TCS already has a significant premium to both the Indian names as well as the US listed peers which the IT companies have. To that extent, it is very difficult to see a rerating in the stock. The execution has been solid and because of that the stock has continued to do well, but we do not see a rerating happening.
Moving onto Wipro, on the turnaround while they have seen some improvement, the deal wins have not really been significant enough to call for a near-term turnaround. There have been some improvements like client mining has gone up. Number of USD 100 million clients going up, attrition coming down. So there are some qualitative improvements, but it is difficult to say that in the next six months we are going to see a big pick up.
HCL Tech has been our top pick in the sector for the last three years or so. We continue to like it. It is company with a solid execution. Over the last 10-12 quarters, they have continuously been doing well. Return on equity (ROE) of now around 30 percent, so those have also been going up and yet you are getting the stock today at 13 times this year's earnings. So, the stock does look attractive at 13 times FY14. It is our top pick in the space. Q: What is your take on the media sector? Do you have any top picks in that space?
A: Digitisation has clearly been a game changer for media sector. From a broadcaster's perspective the subscription revenues show very good growth over the coming years. The DTH and cable companies should benefit from the same trends as well and so it is a game changer. But how much of it is already priced into the stock.
Most of the stocks had very good run over the last year. In that context, we have Dish TV as one of the top picks which is the largest DTH player. The stock has not done much. We upgraded it only this year, March end. This is because our view was after the underperformance and the fact that management was now focusing more on profitable growth rather than just chasing growth, the stock was looking very attractive. So Dish TV is our top pick.
On the print media side, DB Corp has been a stock which we have liked for a while. That continues to look quite attractive. It has outperformed its peers by around 30 percent in the last one year. It has been on the back of a very strong execution and so its something we continue to like. We have a sell on Zee, despite all the benefits coming in, because our view is that a lot is priced in. To that extent, at 26-27 times unless earnings surprise meaningfully, you will not have any material return on the stock.