The outlook for Indian IT companies over the next 12 months looks bright on back of robust demand said Hitesh Shah, IT Analyst at IDFC Securities. Especially, with discretionary spends returning in US, and UK too improving would definitely bode well for these stocks, he added.
Since IT stocks have been out performers in the last 6-12 months, so some profit taking was natural, he said. However, yesterday's downtick could have been because Cognizant's conservative guidance but he is not overly worried about that.
Cognizant India is on target with its fourth quarter numbers with profits rising by 16 percent. Revenues were also up 2.5 percent. But what caught the eyes of investors is the company's growth guidance, which has been pegged at 16.5 percent for this fiscal.
Going forward, according to him Indian IT services will see a convergence of growth. Therefore, the growth could converge anywhere between 12-16 percent for the current and the next fiscal.
Below is the interview of Hitesh Shah, IT Analyst at IDFC Securities with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Sonia: Some people have termed the 16.5 percent guidance by Cognizant a bit conservative. What was your reaction to that and how do you think IT stocks could get impacted?
A: We did not have any expectation from what Cognizant would guide as we do not formally cover that stock. If you look at Bloomberg’s consensus estimate for CY14 on Cognizant, it was almost USD 100-110 million ahead of what they had guided for. So guidance was already lower than what was street expectation in my view.
Having said that, Cognizant has been one of the fastest growing companies amongst the Indian IT services players. What our hypothesis has been for the Indian IT services is there would be a convergence of growth, which would happen over next couple of years. If you look at the FY13 numbers, Infosys and Wipro grew at about just 5-6 percent year-on-year (Y-o-Y) growth while someone like Cognizant or Tata Consultancy Services (TCS) were in mid-teens to high-teens. When we would end FY14, this would converge from probably 8-16 percent and could further converge between 12 percent and 16 percent next year. This is our view, which broadly fits into what our thesis has been. We would not be very worried on that.
The demand environment remains strong in my view, which is what management reiterated in their call as well.
Latha: Yesterday the Cognizant stock took a big knock in the US markets as well we have been seeing a lot of profit taking in the Indian IT stocks. Therefore what should the IT stocks pick or take from both the Cognizant results and the recent downtick in IT stocks?
A: I would not have a view on Cognizant as I do not formally cover that. However, Indian IT stocks have been big outperformers in the market over the last six-twelve months. There could be some profit taking that could happen here because maybe one of the data point that came from Cognizant was not as positive as street was expecting from them.
Having said that, our view from 12 months perspective is the demand remains very robust. US is seeing a return of discretionary spend with improvement in UK also seen towards the lat e 2013 and some green shoots of improvement happening in the continental Europe which are the key exports market for Indian IT, which should account for almost 75-85 percent of their revenue doing well.
We believe the revenue growth from some of these companies would be better than what it has been in the last 12 months. On valuation front, while they might be premium, would get sustained as demand remains very strong.
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