Prabhudas Lilladher bullish on demand environment of IT cos

Shashi Bhusan, IT Analyst, Prabhudas Lilladher is bullish on the overall demand environment of IT companies. From the largecap space, he is bullish on HCL Tech and Infosys and expects them to outperform some of the larger peers. He prefers Polaris and MindTree in the midcap space and Persistent Systems in smallcap. 

Below is the verbatim transcript of his interview with Sonia Shenoy and Latha Venkatesh of CNBC-TV18. Also watch the accompanying video. Q: Take your pick, what is the best of the pack so far for you? A: We continue to remain bullish on the overall demand environment of IT companies. For the largecap we are positive on HCL Tech and Infosys, we expect them to outperform some of the larger peers. Largely, HCL Tech continue to gain share along with the margin expansion story. The financial health of the company is also improving. Their free cash flow to EBITDA ratio has been improving over the last two quarters. We expect that trend to continue for atleast next quarter and then again we will enter into wage cycle. We expect the margin to take a dip; however, we expect them to deliver industry leading growth atleast in the top quartile compared to both Indian and global peers like Cognizant, Accenture and Capgemini. Also Read: HCL Tech in outsourcing pact for Mecom Group's IT ops Q: Just a word on MindTree because that really surprised with positive earnings and the stock reacted quite favorably after the kind of rally that we have had how do you stand on that stock? A: For MindTree we have accumulate rating. We believe that with the current management rejig and their increased focus on core business and verticals has started delivering results. This quarter was ahead of our expectation 7.3% growth and 6.2% in volume term. However for the near-term, atleast for the next quarter we believe that there are some margin headwinds. A wage hike for almost like 25% of their employees is remaining, which will have a margin headwinds of somewhere close to a 200 basis points. However, we believe that the volume momentum for the company is likely to be strong in IT services and product engineering services has also started seeing good traction. If you exclude Kyocera acquisition they grew in this quarter by almost 4.8% quarter on quarter, which is a healthy growth. Q: What are you working with by way of a earnings for FY12 and maybe even FY13 for MindTree and do you think that the 10 times or something that they have been getting would be improved on, the market will now want to give it a slightly higher valuation or is it all in the price already? A: Multiple rerating will come once the performance is more consistent. The company has been giving very volatile earnings over the last four- five quarters and that