See domestic IT growth at lower end of 9-12%: Equirus

Nasscom expects the IT sector exports to grow by 13-15 percent as against 13 percent (Y-o-Y) in FY15. The domestic IT market is expected to grow 9-12 percent and the additional FY15 revenue will be USD 13-14 billion in FY15, said Nasscom.

Below is the interview of Bhavin Shah, CEO, Equirus Securities and Anand Deshpande, CEO & CMD, Persistent Systems with Latha Venkatesh and Ekta Batra on CNBC-TV18.

Latha: The overall exports growth is seen at 13-15 percent versus the actual of 13 percent in FY14. What is the sense you are getting - conservative or is this on the ball you think?

Shah: It is largely on the ball. There is potential for the number to even exceed 15 percent, maybe slightly, maybe by another percentage point, but I think it is a good indication based on what we understand from a pretty broad survey done by Offshore Insights.

Ekta: The domestic IT growth is expected to be around 9-12 percent in FY15. Your thoughts on that?

Shah: The domestic sector has been a laggard and if anything I would peg that number towards the lower end at least in FY15, because even any new government, I am not sure they will have an immediate effect of improving that spending environment. Domestic I would probably tend to think on the lower end and the export I will tend to think the number could be on the higher end.

Latha: We have seen a 70 percent run up in 2013 in some of these stocks like HCL Technologies, some profit taking of course in the last few weeks. At current levels has this good news largely been priced in?

Shah: I think the fundamentally speaking in other words one looks at very basic free cash flow based valuation, answer is yes, however as we have seen with lot of sectors, for example the consumer sector, for number of years it continued to inch higher in terms of valuation when the growth was good.

We think similar thing is going to happen with the IT sector that with a good outlook for growth and good likelihood of companies delivering on expectations or slightly better than expectation the current multiples could by and large sustain and so you get the upside primarily from the earnings growth so that is why we still see upside in the IT stocks, though we think the percentage upside will be significantly lower than what we have seen in calendar year 2013 and when I say significantly lower I mean maybe between high single digits to at the most 20-25 percent depending on the stock.

Ekta: The expert guidance has come in at 13-15 percent, this compares to 11-14 percent in FY14. Do you think that we could reach the upper end or maybe even scale past or is this a fair guidance for FY15?

Deshpande: I think it is a very fair guidance as far as Nasscom is concerned. Clearly they are counting on the largest companies to make the numbers that are being suggested. While the market as such looks pretty good in general there are many challenges as well. So I think from a guidance point of view the guidance given is very fair.

Latha: What is your own sense in terms of the billing ability of companies? Will the increased market also come with greater billability?

Deshpande: You have to look at the guidance from the sort of short-term long-term perspective in the sense that most of the guidance that has been given is for the services companies and for a services market at this size to grow 13-15 percent is actually very healthy. From the India point of view if we want to see bigger growth we have to look at other drivers for driving software growth, specifically possibilities of maybe certain product companies doing very well and seeing some very good home runs in some sense. Some variation from services to other kind of businesses could really give us the uptick that might see, but again those will not translate to the same number of people, but revenues could be better.

Latha: Where do you think the markets have not yet priced in what Anand Deshpande and the Nasscom is telling us in terms of better markets? Do you see more headroom in the second-rung IT companies? Any favourites?

Shah: Persistent Systems remains one of our favourite midcap names along with eClerx and we also have been recommending Hexaware, though we think upside on Hexaware might be a bit lower now. So those are the names that we have been recommending in the midcap space.