Nomura India’s IT analyst Ashwin Mehta expects next year to be better for the Indian techonology sector than this year in terms of demand. He feels better discretionary outlook and budgeting in the US next year will drive demand further.
Also Read: S&P ups TCS, Infosys, Wipro credit rating to A from BBB+
His top buy continues to be HCL and Cognizant, and he prefers TCS over Infosys. “TCS has underperformed Infosys. In terms of valuations differentials, it is just above 10 percent,” he says. According to him, in terms of fundamentals, TCS is better. From hereon, everything will depend on who gains the most out of demand upturn, and TCS has no portfolio issues or sales issues, he says. "It’s the best place in terms of cost efficiency and discretionary side of things. Though Infy continues to remain a buy, he is not convinced about the company’s longer term sustainability of growth momentum," he adds.
From a one-year perspective, he sees 15-20 percent upside in these IT stocks from current levels.
Nomura India had downgraded Wipro before the results. Mehta says most of the good news is already in the price. From hereon, Wipro needs to outperform on growth for it to perform, still there are portfolio issues in terms of developed markets being weaker, among other issues.
Below is the verbatim transcript of Ashwin Mehta's interview on CNBC-TV18
Q: In less than a month from now we will be talking about Infosys’ earnings and the entire pack and the mood has been quite positive after comments coming in from the management that they expect 2014 to be much better than this year. How are you going into the earning season this time and what would your top picks be?
A: We think the next year should be better than this year in terms of demand and the continuing themes will be Europe, it will continue to be strong in our view, Infrastructure Management Services (IMS), business process outsourcing (BPO) segments will continue to be strong and what will create the delta is US in particular, which till now hasn’t participated despite the macro improvements that have happened and we think discretionary outlook and budgeting in US should be better going into the next year. So, we remain overweight on the sector and in terms of our preferences HCL Technologies and Cognizant remain our top buys within the space and among others we prefer Tata Consultancy Services (TCS) over Infosys.
Q: Why the call of TCS over Infosys. Is it because of recent underperformance of TCS compared to Infosys and the price to earning (PE) rerating in Infosys, do you think it has done its bit or can it rerated further?
A: I think one of the reasons is the fact that TCS has underperformed Infosys and in terms of valuation differential, the valuation differentials are now just above 10 percent, which we think is justified given that the predictability that TCS is likely to deliver. In terms of fundamentals, we continue to like TCS because in our view from hereon the moves are likely to be driven by who gains more out of demand upturn and we think TCS has no portfolio issues, no sales issue as such and it’s best from cost efficiency as well as discretionary side of things. That is the reason for preferring or switching preference to TCS over Infosys. Infosys has had a good run, we still like the stock, it still remains a buy for us but we are still not completely convinced about the longer term sustainability of the growth momentum. So, while we are positive on the cost initiatives that the company is taking or the demand upturn should help on the discretionary side, I think longer term sustainability of that growth momentum is an area where you would want further reinforcements.
Q: What could the average returns be in 2014 on these stocks because if you look at 2013, a stock like HCL Tech has almost doubled, TCS is up about 65 percent since the start of the year, do you think the returns could be as significant in 2014 as well?
A: I think the better part of the returns or the easy returns have been made but we still think there is 15-20 percent upside in these stocks from current levels from a one year perspective and HCL is a stock where we still see a 20 percent odd upside from current levels, TCS would be closer to that, slightly lower and Infosys would be in 10-15 percent on our target price.
Q: Among largecaps your least preferred is Wipro but that has had a strong rally, do you think it is pricing in almost a best case scenario now?
A: We have a buy on Wipro; prior to the results we had downgraded Wipro. Our view is that essentially most of the good news is largely in the price and from hereon Wipro needs to outperform on growth for the stock to perform and still there are portfolio issues in terms of US or developed markets being weaker, still emerging markets contributing a large proportion to their growth, there is a landscape issue in terms of banks, financial services & insurance (BFSI), which is one of the segments driving demand and IMS is another segment where we believe the traction is likely to be stronger at TCS and HCL Tech compared to Wipro. So, while there have been improvements, at the current prices we think most of that is getting priced in. So, while there are not material downside risks, the upsides are going to be better in other names.
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