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Of late the big guns of Indian IT including Infosys have not really managed to impress the market. Keeping a close track of the IT space, Surendra Goyal, Director & Head of Research, Citi India in an interview with CNBC-TV18 said that though, they had downgraded Infosys three years back, it is actually a good company going through a difficult phase.

Goyal said that some investors are willing to take a valuation call on Infosys and is best suited for long term investors. He also feels that the macro environment for IT is quite tough and expects the Banking, Financial Services and Insurance (BFSI) segment, particularly the investment banking vertical to remain challenging.
However, Goyal is positive about HCL Tech, Wipro and Tech Mahindra. He also holds a neutral valuation for TCS. Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.  Q: Citi has a non-consensus buy call on Infosys, but Infosys has disappointed in the past few quarters in terms of its earnings, plus the guidance has also been muted. What's the buy call predicated on and how are investors viewing the valuation versus the growth picture for Infy at the moment?
A: First I would want to provide a context here. We downgraded Infosys almost three years back before the street turned negative. At the same time we had upgraded TCS to our top pick in the sector. This was approximately three years back. Today, where we stand, we think that it's a good company going through a difficult phase.
At the same time, valuations are looking very attractive for longer term investors. It's a company which is sitting on USD 4 billion of net cash. It generates some very healthy cash flows and we are expecting 12% kind of earning CAGR. It's not like the company has gone ex-growth.
We believe that this weakness is because people have given up and a lot of pessimism provides some entry opportunity for longer term investors who have a one plus year timeframe. Near-term, yes there are challenges which have been visible in the last few quarters.
But our belief is that as soon as there is a bit of growth, which comes in with expectations being low, the stock should trend up and which is the call we are taking here. That's the reason why we have upgraded it for the first time in the last three years. Q: Looking at the market conditions and the factors that are affecting the IT sector at the moment, do you think they are biting the bullet? Are they taking a valuation call to buy right now?
A: It's still a mixed view. I wouldn't say that everybody is really jumping into buy Infosys. There are certain longer term investors who are ready to take that call. The fact is there is a lot of pessimism on Infosys and on India in general.
A lot of investors I have met in the last few months have generally been negative. But at the same time, there is a set of longer term investors who are ready to take the view that things are difficult, but they are priced in.
With a little bit of good news, despite so much pessimism in the market and on Infosys, you could see some upward moment. Yes, some investors are ready to take that call, but it's not all across. Q: The demand picture seems quite varied from Infosys or Wipro on one hand and TCS on the other hand, which is a bit stronger. How does one approach TCS or HCL Technologies etc where the results have been strong but the stocks consequently have run up quite a bit. What do you think would be the expected return on something like that?
A: First, I do not think there is a very big difference in terms of what the top companies are telling us. If you go through what companies have said in the last six months, for Infosys the guidance is muted, for Wipro the guidance is muted and in the US you had another big IT services company which came and revised the guidance lower.
HCL Tech has been saying that the macro is tough but, it's more a market share view. In January when TCS did the earnings call, they had said that a lot of discretionary projects got delayed and their commentary was a lot positive after the last quarter.
But, if you take all the companies together, my view would be that what they are saying is that the macro is still tough. It's not an easy environment. Maybe, some companies are gaining a little bit of share while the others are not.
The second thing you have to put the demand picture in terms of verticals. BFSI or financial services is the market which is challenging and it's likely to remain challenging, particularly the investment banking segment. But, if you look at retail manufacturing, healthcare, I think those are areas which should be fine going into the next year. Q: One or two key parameters which stood out in the past couple of quarters and in Q4 was BFSI as well as North America which actually declined. Do you see that trend being extrapolated and becoming a bigger problem in FY13?
A: Our expectation was that going into the result, this is likely to happen, particularly in financial services and to some extent in North America. The key reason was that most of the banks or financial institutions are going through a tough phase and the start of the budgeting cycle is usually expected to be slow. That is what we saw playing out.
Through the course of this year we will see some recovery, some pickup. At the same time, investment banking is an area which we expected to be challenged, at least in the near term. But, the other parts of banking like retail banking should be fine.
I think that's the key here. I think there will be a pick up but not a very big pick up and that's a large part of revenue. That's the reason why we are expecting growth to be slightly slower than what these companies have done in the past. Q: We have seen the rupee fall sharply even beyond what anyone would have expected in the near term. How much of a tailwind could this be for the IT companies? Could it provide the defensive edge that people may be looking for in the current environment?
A: You have to look at it in two parts. In the short-term, I do not think big rupee depreciation is materially beneficial from a stock perspective. You could see stocks benefiting in the short-term. But if rupee goes back, then it doesn't help and what could also happen is there will be hedging losses because these companies were partly hedged.
It might not be a big tailwind. But, structurally if we are moving earlier, people were expecting the rupee to be at 48. Now they expect it to be at 52. Estimates do get revised and it becomes a longer term benefit. That is what could be a positive for the sector.
But, our view is that business outlook is the key driver and currency is something which impacts the margin. And the core drivers will continue to be business related. Q: To summarize, what's the picking order right now, including midcaps? Do you think midcaps would be slightly preferred over large caps given the better growth profile or do you think they have run their course?
A: In terms of the top five stocks in the sector, HCL Tech is something which we have been positive on for almost a couple of years. We think it's a good market share gain story in a difficult IT environment and valuations are pretty attractive for the kind of growth it provides. HCL is something we continue to like. That's been one of our top picks and continues to be so.
Secondly, Infosys we have just turned positive. We think that it's at a point where valuations are really attractive and pessimism is very high. With a little bit of a turn on business, you could actually see the stock doing very well. So at 14 times one year forward, Infosys does look very attractive to us.
The third stock is Wipro where again they have gone through a restructuring, reorganization and to that extent, things have been slow. But, they are showing some signs of picking up. Again their valuations are pretty attractive.
TCS is a great company. We had it as a top pick for a while, a year and a half, couple of years back. But, at the same time, valuations at 18 times don't provide too much comfort at this point. They have a large exposure to banking and capital markets. That is something one needs to be cognizant of. With high expectations, high valuations, we have a neutral at this point.
The fifth name is Tech Mahindra. Our concerns have been primarily on the core Tech Mahindra side of the business where telecom and their largest client exposure is a challenge. That is how our expectations would stack up for the top five names in the sector.
On the midcap side we don't have a big coverage. So our thesis has been that HCL Tech is possibly a better play, which is not a midcap but provides growth. It provides an opportunity to gain market share from IT services landscape perspective. That is something which we continue to recommend to clients.