Buying Infosys/TCS can assure 11-12% returns: Dipan Mehta

In an interview with CNBC-TV18, Dipan Mehta, member of NSE and BSE, gave his perspective of the fourth quarter performance and divulged his views for the IT sector.

Below is the verbatim transcript of the interview. Also watch the accompanying video. Q: How do you read valuations for IT like Infosys and TCS? Is there headroom?
A: No. The valuations are fair. For PE to get upwards, we have to factor in about 25% of a bottom-line in rupee terms. This appears a bit difficult given the kind of situation and the base effect. They are fair and the investors recognise this fact. What goes in favour of the IT companies is the predictability with which they are able to deliver the earnings.
Buying something like Infosys or TCS can assure 11-12% returns on their investment assuming all things are equal and there are no major crises or setbacks for the markets, which goes in favour of these companies. At the same time, they form the large portion of the index. A lot of money is coming in though country fund and index funds.
Automatically, these are the recipients of a large amount of FII inflow because there is an overwhelming weightage in the Sensex and Nifty. From an investor point of view, we have to bank on the bottom-line and EPS growth, and hope that these kinds of returns are in sync or match the bottom-line growth for these companies.
Another thing which goes in favour of these IT companies is scarcity of the stock. In most of the other large Sensex companies apart from FMCG, we can expect some kind of a dilution or sale of treasury stocks.
It is highly unlikely that TCS, Wipro and Infosys will ever dilute their equity for the next several decades, if not longer. That scarcity value tends to get built in and the consistency of performance is highly appreciated. These companies typically form the core holding of a lot of investors. This is where we are looking out for them to deliver stable earnings.
This kind of a 25 PE multiple band on the lower side maybe 30-32 on the higher side, which has been observed in the past. That I the kind of trading band as far as PE ratios are concerned. Q: How are you reading Infosys numbers?
A: With the kind of resignations coming in, it is pretty rare for a company like Infosys which has a great succession plan. They are always proud of the fact that they are able to retain all their top level employees. The management may have some explanation to do. Results apart, this kind of a churn at the top level is not looked up on favourably by investors. Q: What do you make of the guidance? How is the stock reacting?
A: It is extremely disappointing. Last time around when they gave guidance, they were hardly able to beat by Rs 8-10 EPS, which will play on minds of the investor and analyst.
One thing is positive that Mohandas Pai