Infosys to maintain revenue guidance at 6-10%: Anand Tandon

The market may rise 50 or 100 points, but the upside is capped beyond that, says Anand Tandon, CEO, JRG Securities.

Talking to CNBC-TV18, he says the market is range bound, and as there are no obvious domestic or international triggers, there is no reason why there would be a significant rally. Also read: Sensex gains 382 pts as Fed eases angst; banks, metals lead Talking about Infosys’ results expected on Friday, he says there is no reason why the company should cut its FY14 revenue guidance of 6-10 percent. Below is the edited transcript of his interview with CNBC-TV18 Q: The big risk on everyone's mind is that Infosys may go ahead and cut its FY14 revenue guidance of 6-10 percent. What are you expecting from the company on Friday and what is your general approach to the stock? A: There is no particular reason that I can see why they should be looking to cut the guidance unless you feel that currency changes may have affected them somewhat. Otherwise it is unlikely that we have seen on the regulatory front that will affect anything in the immediate term. I don’t see that the market is any tougher in the US than it was at the time when Infosys made the guidance in the first place. National Association of Software and Services Companies (Nasscom) too has pretty much stayed where it is in terms of its guidance for expectations for overall volume growth. So, other than the fact that the margins may be somewhat subdued because of the increase in salaries if some part of that has already been reflected now, it is unlikely that there should be too much change or variation from the guidance that they gave out. Q: You did talk about the situation in the US briefly but I am going to peg that with regard to the tapering and the big question about that because we have seen this rally come through on our markets simply because the timeline might be a little unclear now with regards to when the Fed could now taper. What is your opinion? Do you think that there is some amount of calmness which has come into the markets and we could see further upside from current levels? A: The Indian market's upside is capped. I am not talking about the next 50 or 100 points, which is entirely possible. We have seen the market in a range and I don’t see anything in the market either domestically or in the international markets which will cause the market to move out of this range. So, I don’t see any reason why we should be expecting any major upside. Downside potential could open up if we have any other negative news either in terms of bringing forward the schedule for cutting back the taper or any other kind of problems that may arise in Europe. The deficit in terms of the current account continues to remain a problem and while we have seen the finance minister again making a tour around the world I don’t think that they are focused on where the problem is which is the problem of being able to make money in this country. Q: What are expectations from the earnings season in general this time around? When you look at some of these estimates, you get a feeling that this could be the worst Q1 that we have seen in a really long time because of the slowdown in the economy, but how would you go into it? What would you be most skeptical about? A: Most estimates seem to indicate that this may be amongst the worst in the last 15 or 16 quarters that you will see in terms of sales. Possibly profitability may be a little better at least for the Sensex companies, largely because the estimates themselves have been beaten down quite a bit. That said, I don’t see downgrades stopping anytime soon. The analysts are still reasonably optimistic about things like steel and so on. I believe that some of the analysts have started to reduce the estimates on companies like Tata Steel and quite dramatically at that, given the global slowdown and the weakness in prices that we have witnessed. Consequently the drivers for the earnings this season are going to be very limited. Already the market is telling you that because there are only 3-4 stocks which have outperformed the market over the last few months. So, it pretty much remains that some of the leading private banks and perhaps Reliance which should be leaders in terms of contribution to the growth in earnings. For pretty much the rest of the sector, I think the tidings don’t look so good. Cement is unlikely to do well now. Auto is under pressure. Public sector banks have already seen significant pressure. IT may likely to better. FMCG is already grossly overpriced and if at all, may have a negative surprise. Pharma continues to remain something which is doing reasonably well, but I don’t see that you will make a lot of money by holding on to some of those stocks. Q: What are you making in terms of the whole macro situation that we are working with, especially with emphasis on growth? We have the IIP numbers which are coming out tomorrow and that is expected to be dismal at around a growth of 1.5 percent. Not to mention that we have some dismal data coming in from the likes of Mahindra and Mahindra (M&M) which is now considering a production cut as well. Where does this leave us in terms of growth in an environment where we also have the rupee depreciating as well as inflation possibly hiking up in the next couple of months? A: That’s exactly the problem. We have moved from being an investment economy to being a consumption economy. For the last many quarters now what has been driving India has been the consumption effect largely driven by inflation. That effect has slowly begun to taper-off. So, the one driver that was there which was domestic consumption has gone away. Is it likely to come back? I think yes. If the Food Bill were to go through, you will probably find that with a lag of 6 months or 9 months or may be a year, the domestic consumption story will again start to pick up and you may want to get back into an FMCG or something of that sort at that time. But the fact of the matter is it will also be reasonably inflationary and will already test a fairly stressed-out macro picture in terms of taxes and so on. So, the picture looks quite grim any which way you look at it. It is not going to be sorted in a hurry. More importantly, the government has apparently more products in the pipeline. There is a specific programme that I hear being talked about of transferring money to women in every household below a certain level and so on. So, those will provide even greater macro stress. I don’t see the problem either getting solved or slowed down anytime soon. Q: In terms of the earnings season, you did give your brief in terms of what you are expecting but if it was one particular sector that you had to lay your money on in terms of decent set of earnings, which one would it be? A: I don’t know whether it’s this quarter or the next, but I would say that utilities is probably the one place which still leaves something on the table. Q: You heard all this news and you have heard a lot about the capping of natural gas pricing and may be even the outstanding gas being sold at old prices of around USD 4.2 per mate. What have you made of this and the cap of around USD 6.8 per mate now? A: It is a very complex topic. So, I don’t want to try and dwell into various aspects of it, but the bottom-line is that the companies which have the gas will obviously benefit and therefore, to that extent, the stock price and those who own those stocks can hope to make some benefit out of it over the next year or two. Whether this was the only formula or whether the formula should have been tweaked, there are lots of pros and cons and that requires a different debate altogether. Q: In terms of the Reliance stock as a whole, how would you approach it considering that it had run up on the back of this news? But would there now be any trepidation even on the issue of outstanding gas that we have already spoken about? A: From hereon, Reliance should outperform the index. But as it is a part of the index it cannot completely stay away from it. It has already done reasonably well over the last few weeks and I would expect that out performance to continue. Q: Talking about this from a macro level, does it change things around that may be the government was decisive about a decision in terms of some amount of implementation of a reform even ahead of elections. Would that give you a little more certainty that may be we could see something more decisive possibly in the monsoon session come August third week? A: It was due to happen. So, I am not sure whether you can call it decisive. The other thing is that whether this is reform or not is another ballgame. The only hope that you have is that it will increase the availability of gas in the country and may debottleneck some of the fertiliser and power plants which have been setup in anticipation of the gas which did not come. Do we expect the government to suddenly become very active in terms of taking policy decisions? I with regard to FDI, possibly yes. Will it be necessarily good for India or for the macros? Possibly no. Will it all happen in the monsoon session? First they have to get the Food Bill passed and there are likely to be a lot of issues regarding the Jet-Etihad deal and so on. So, I don’t think that you will get a lot of business done. At the same time, you will probably find that the government is willing to make a few changes even after the monsoon session before they declare the elections even if it has to be through an ordinance.