Shishir Asthana & Himadri BuchMoneycontrol
Kotak Securities is taking a contrarian bet on information technology as the brokerage firm believes the sector will be out of woods in the next one year, according to Dipen Shah, Senior Vice President-Research, Kotak Securities.
"Post the recent backlash against the immigration policies, the new administration might not want to pedal hard and may prefer to adopt a softer approach,” Shah told Moneycontrol in an interview.
“The concerns which are an overhang on this sector might actually be addressed sooner or later and that is the window to buy and look at higher prices,” he added.
Despite headwinds for the sector over the past few quarters, IT companies have been expanding their presence in digital and are embracing automation, Shah said.
"TCS has got annualised USD 3 billion revenues from digital services. Infosys says work of more than 2,600 people have been taken over by automation in 3Q FY17. Today, digital is growing at a very fast pace but the traditional businesses are de-growing so that is impacting the overall growth rate," Shah explained."So, once when digital becomes substantial say 30-35 percent of revenues then the traditional business will matter less,” he added.
A sports aficionado, Shah, believes that one of the ways to overcome the digital concerns is to acquire niche companies which can improve the skills sets.
He added:, “There will be lower growth rates for the next one year but it’s not the end of the story.”
"First, US and Europe cannot do without Indian IT. Even if they can do it and can squeeze IT companies, IT companies have got enough fire power to retrain their people and deploy them in terms of new projects with significant amount of automation,” adds Shah, who likes to play cricket, badminton and table tennis when at leisure.
Among sectors, Kotak Mahindra Bank promoted brokerage house is upbeat on infrastructure sector following the government’s strong focus. They are also bullish on cement sector on the back of government’s push to affordable housing and also likes selective auto, pharma and IT companies.
The brokerage firm is incrementally becoming positive on the banking space as they expect the NPA issue to peak out going forward. Kotak Securities will continue to avoid PSU banks with high NPAs.
Shah believes after the Budget, GST and monsoon are the two big triggers that market participants will closely watch for; however, he adds that dollar index movement also partly determines the flows into the Indian market.
On the valuations front, Shah believes that current valuations are 'slightly' on the higher side than the long-term average.
"Market is not exactly cheap but the liquidity flows are coming in thick and fast and that is something which will keep the market at these (current) levels for some time but valuations are becoming slightly high,” said Shah who follows a bottom-up stock-picking approach.
When asked on what could be the biggest negative for the market, Shah said, "Liquidity is driving the markets right now and we have to be very watchful of that. Something happens and liquidity dries up then that comfortable valuation is not there."
"Liquidity can keep the markets higher for a longer period of time and as Warren Buffet says markets can remain irrational longer than one can remain solvent, but at the same time we should not bank on liquidity and try to buy. One should be more cautious on valuations from now," said Shah adding that mid cap index is at all-time high and one needs to take cognizance of that.
Speaking on the on-going earnings season, Shah says the impact of demonetisation was not severe on the companies as expected and most companies have 'surprised on the upside’. The brokerage house is now looking forward to fourth quarter earnings of FY17.
Shah likes reading investment books and admires Jeff Choudhary among fund managers.
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