Expect Infosys to see max upside revision: Cowen & Co

Nasscom's optimistic forecast for the Indian IT sector is very much inline with his own expectations, said Moshe Katri, MD, Cowen & Co. After 3 years of being slammed for reporting conservative numbers, Nasscom has finally given a strong guidance for the coming fiscal. For FY15, Nasscom expects IT exports to grow by 13-15 percent and the domestic market to grow by 9-12 percent. Industry revenues are expected to reach USD 130 billion. This confidence is based on economic data and the increase in global IT spending & global sourcing models.Speaking to CNBC-TV18's Reema Tendulkar and Latha Venkatesh, Katri said Indian IT companies are showing potentially better top-line growth for 2015. On top of that, he feels the PE multiples may come back to where they were pre the last downturn, which is anywhere between 20-25 times earnings.

Also read: See Infosys 2015 earnings grow around 3.30-3.50%: Cowen Katri observed that there has been slight up tick in discretionary spending. Financial services as a vertical will continue to look very healthy in terms of spending patterns, states a survey they released back in December, which is in line with NASSCOM’s predictions.

Below is the verbatim transcript of the interview:

Q: What did you make of the guidance and if we just assume the middle end of the guidance of 13-15 percent, it will be 14 percent which means it is just 100 bps higher than what they are expected to close FY14 with. So then perhaps, does it justify the kind of big moves that we have seen in all these IT companies, at least the top five?A: NASSCOM's predictions are very much in line with the feedback from the survey that we released back in December of last year. Survey spoke about an up tick in discretionary spending. The survey spoke about further budgetary penetration for the India centric firms. The survey told us that financial services as a vertical will continue to look very healthy in terms of spending patterns and on top of that the survey told us that Continental Europe will continue to provide a very strong growth engine for the industry. Valuations also are really going to be relative to the market. You have a number of large cap IT companies which have a strong year with at least 15-20 percent top-line growth. In our view that includes Tata Consultancy Services (TCS) and Cognizant, you have the likes of Infosys that are showing potentially better top-line growth at least for 2015 and on top of that you can also argue that PE multiples may come back to where they were pre the last downturn which is anywhere between 20-25 times earnings. So, on a relative basis you can make the justification assuming the global macro picture remains stable. Obviously if that does not happen we are talking about a very different ball game.Q: You spoke about 20-25 PE. A company like TCS is already at the higher band of that kind of valuations. Will it be able to set new valuations you think?A: Three months from now, we are going to start looking at numbers based on calendar year 2015 numbers and based on calendar year 2015 earnings potential, we are going to be looking at stocks that are going to be trading at somewhere in the 16-17 time range. Based on that, in our view, there is definitely more room to go for a lot of these names.Q: What about margins or billability, billing freedom for any of these companies? Will they just have more volume of business or will they also be able to bill higher?A: I do not think anyone really is updating on higher bill range, we are just going to be updating on a very normalized pricing environment. So pricing is going to be steady. Obviously we have to look at for wage inflation at this point. Margins should be relatively stable assuming also that you do not have any major currency headwinds or tailwinds.Q: Given the NASSCOM guidance, given the survey that you all have done and the possibility that IT stocks might get re-rated even further from here on, is there a possibility that you are going to see a lot more by way of EPS upgrades over the next 3-6 months. What is your expectation there?A: In our universe, there are two companies that probably have the most upside in terms of revenue and EPS upside revision. One would be Infosys and in our view, the market's expectations for fiscal year 2015 top-line growth are relatively conservative and on top of that you still have a lot of skepticism about where margins are going to go down the road and if that did well and if they continue to show the trends that they have shown in the past two quarters, we do think that there is a lot of upside in terms of those upgrades. The other company in our universe is Computer Sciences Corporation. That company is going through a restructuring process and in our view, there is a lot of skepticism about their ability to show a better top-line growth. If you look at some of the other companies, look at Cognizant, they guided for 16.5 percent top-line growth we do feel that ultimately they can probably post another at least 20 percent top-line growth here. TCS probably also will show some upside, but again on a relative basis as I said, there are two names that really stand out in our view - Infosys and Computer Sciences.