Prefer infra, banks to IT; hold L&T: Bowen Asia

Despite Infosys posting better-than-expected results on Friday, Aadil Ebrahim, MD, Bowen Asia was surprised by the huge upside witnessed by the stock. He, however, has no intention of owning the stock at the moment.

 

Speaking to CNBC-TV18, regarding his take from Infosys numbers, Ebrahim says if India's gross domestic product bottoms out and there is an uptick, he does not see the IT bellwether doing as well as some of the other domestic infrastructure, banking stocks.

 

"If investors want to take a longer term approach, if currency stabilises and growth hopefully picks up in the second half of the year, there will be other areas to look at than just the IT space," he adds.

 

Ebrahim recommends holding Larsen and Toubro (L&T) and would want to increase his position there. Also, he is bullish on PSU stocks with regards to quality management and delivery.

 

Below is the verbatim transcript of Aadil Ebrahim's interview on CNBC-TV18

Q: We have seen about 11-12 percent upmove in Infosys. Do you think the kind of earnings they delivered, warranted such a big upmove and what do you think of the road ahead?

A: No, it does not warrant such a big upmove. There has just been some stability in quarterly earnings. But the share price seems to react quite violently on the upside and the downside. There was no big family holding. There are a lot of hedge funds playing around here, but the numbers have been fine and volumes look okay. Margins are coming off which may tell you that volumes may pick up. So overall, it did not warrant a big upmove, but it is the way the share price trades these days.

 

Q: With regards to Q1 performance, do you think the company may have turned the corner after those series of disappointments?

A: I disagree that there has been a series of disappointments. They turned the corner a couple of quarters ago where the Infosys 2.0, 3.0 diversified its business by being in healthcare, expanding in retail, having some quarterly gyrations. They are heading in the right direction, but share price just seems to trade very violently which is quite surprising.

 

Q: Will Bowen Asia increase its holding in Infosys based on these numbers?

A: We do not own this stock anymore, but we follow it.

Q: Is it beginning to look attractive to you?

A: Right now we are not looking at this sector. We track it, follow it, but at the moment we are seeing some better opportunities elsewhere, not within India, but outside India.

Q: In your conversation with a couple of your peers, other investment managers or even hedge funds, do you think they will start looking at Infosys?

A: It is tough to say. The currency has played a part in terms of the share price outperforming the broader market in the last couple of weeks, mainly on a currency revaluation. But if gross domestic product (GDP) bottoms out in India and you see an uptick which is still a couple of quarters away, I do not see Infosys doing as well as some of the other domestic infrastructure, banking stocks.
 
If investors want to take a longer term approach, playing currency stabilising, growth hopefully picking up in the second half of the year there will be other areas to look at than just the IT space.
 
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Q: Can you just drill that into some specific stocks that you will watch with interest?

A: We continue to hold Larsen and Toubro (L&T) and would want to increase our position there. They have a pretty strong Middle East order book, but the India order book starts growing 20-25 percent over the next couple of quarters then that share price should outperform.
 
The PSU stocks have been hit a bit harder than the private sector banks, but I still think if you want to focus on the quality in terms of management, in terms of delivering, some of the private sector banks will do quite well.

 

Q: Do you see Infosys beating their guidance this time around? Given the kind of deal wins that they have seen, client additions in internals in general, do you see the possibility of a guidance beat?

A: It looks tough at the moment. If there was a guidance beat, they would have announced it today. They would have raised their guidance. Based on what we are seeing globally, we spoke about Accenture last week, their projects are taking a bit longer to migrate into actual billing and revenues, but with Infosys the onside revenues have started to pick up which is a good sign, but they still remain quite cautious in terms of the demand environment. It is not great out there, it is fine and hence Tata Consultancy Services (TCS) is more at risk as valuations are more expensive than Infosys.

 

Q: You are selling off Infosys shares, but the IT space itself is a beneficiary of the rupee depreciation and there is a mild uptick in the US economy as well. Why this resistance to the IT space? Is it because of the visa rules?

A: The visa rules do play a part in terms of margins. Right now, we do not know how exactly that will play out, but that is a risk going forward. Demand environment is not as great as some companies make it out to be. The International Business Machines (IBM), Accenture are not that bullish. Their revenue guidances are single digit. The Indian IT industry has matured significantly, also you are not looking at 15-20 percent dollar volume growth rates anymore.
 
You are going to transition down at 10-12 percent and then it is a function of better opportunities elsewhere. We do not have to be in the IT sector and there are some other areas that are more exciting which I have already mentioned. We continue to track the large cap IT stocks and they are well managed high quality growth stocks. There are better opportunities elsewhere at the moment.

 

Q: This time around the deal wins from Infosys have been fairly strong. As you said, the demand environment is not so strong, Accenture is providing to a slower growth. How would you read Infosys from deal wins in this quarter? Is it a one-off? Is it an aberration? Is a delayed deal win which have come through for them?

A: They have been announcing some very good deal wins in last couple of quarters and their net client additions have been very strong and therefore, I am not too worried on that front. It is more about the revenue conversion where projects are just taking a bit longer to convert into meaningful revenues and margins.
 
The short-term discretionary spend has slowed down with the global economic environment and so you are getting longer duration projects that are taking a lot longer to scale up. Hence, we need to adjust our financial models to account for that, where margins will take a while to scale up. I am quite happy with the deal wins and the net client additions. They have been fantastic and in this quarter, the utilisation has ticked up which is very, very positive. So maybe there are some onside projects that are scaling up and they will migrate to offshore where the margins will pick up.
 
I am not too negative about the sector, it is more a case of better opportunities elsewhere. The last couple of quarters Infosys have been okay and the share price has been flat in the last couple of quarters. You have up and down, minus 20 percent.