Nomura India neutral on TCS and Infosys

Cognizant announced a lower guidance. According to Ashwin Mehta, IT analyst at Nomura India, Cognizant’s reaction in the US markets, post results, was an overreaction.

He is neutral on Tata Consultancy Services and Infosys. For TCS, his expectation on growth for this year is around 15%. “While we do not think there are material risks to that 15% number, we also do not think there are material upsides to that. In terms of our target prices, we are not looking at more than 3-4% upside from current levels,” he adds. Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video. Q: There was a big reaction after Cognizant, do you think it was an overreaction or do you think it has ramifications for top-line Indian companies? A: Cognizant’s reaction in the US markets, nearly 20% loss post results, was an overreaction in our view. There are some issues in terms of demand. The demand moderation has happened compared to what we were anticipating at the start of the year. Discretionary push backs or issues in US and BFSI remain to be issues which are for the industry, not necessarily company specific as such. That was largely the reason for the Indian stocks also reacting negatively to it. Also, the fact that Cognizant is now trading at parity with Infosys and Wipro and is trading at a discount to TCS was probably the reason why TCS corrected more. Q: For TCS specifically though, would you begin to scale down expectations either in terms of volume growth or what the earnings potential might be? A: We have been neutral on the stock. Our expectation on growth for this year has been around 15% and street has come around to that view. We do not think there is a material risk to that number, though given the fact that across the industry what we have seen is the Q1 seems to be starting off soft. That makes the case for upsides to FY13 numbers difficult. So, while we do not think there are material risks to that 15% number, we also do not think there are material upsides to that. Valuations largely are full. So, in terms of our target prices, we are not looking at more than 3-4% upside from current levels. Q: The big call for a lot of people is Infosys where people are bearish in the near-term, but some investors have started taking a contrarian call on the stock because of depressed valuations. What are you telling them? A: We think it’s still not time to play hope in Infosys. The key reason for that is 63% of their business is still cost deficiency or commoditised business. That’s one area where they are losing share. The second piece, which is the higher value-added segment, is where acceleration is not coming through because discretionary pushbacks are happening. So, unless Infy gets that 63% of business right, we think pure valuations would not be the trigger. Q: Cognizant did indicate though that demand began to drop going into the second quarter and they as well talked about problems from BFSI. Would you expect Q2 to be slightly tricky for some of these IT companies? What do you expect to see thereof from BFSI? A: In terms of BFSI in North America, specifically in the larger banks, is where Cognizant has indicated issues. That’s probably one of the reasons why people like Infosys, Wipro already are guiding for flat revenues in the next quarter. Cognizant has, in post result conference indicated, that they have almost 95% visibility in terms of their Q2 number. So, we would expect the more market share focus like Cognizant, HCL and TCS to do better in the next quarter compared to Infosys and Wipro.