See more deal cancellations in future due to Brexit: Moshe Katri

Infosys seems to be the first real Brexit casualty with Royal Bank of Scotland (RBS) calling off a 5-year contract and industry expert Moshe Katri sees more deal cancellations in coming days on account of Britiain's exit from the European Union.

This may make next two quarters tough for Infosys, he says. Girish Pai of Nirmal Bang believes Infosys' guidance was already at risk even before the RBS deal cancellation. Pai feels Infosys' FY17 earnings will be hit by 30-40 bps.However, from the long term perspective, he likes Infosys, TCS and HCL Tech as they are cash flow generating companies. Pai sees the industry posting mid-single-digit dollar revenue growth in FY17 and FY18.Below is the transcript of Moshe Katri and Girish Pai’s interview to Sonia Shenoy, Latha Venkatesh and Anuj Singhal on CNBC-TV18.Anuj: Your reaction on the Infosys news and Royal Bank of Scotland (RBS) contract getting terminated. First impact of Brexit, you think most of it is in the price or do you see more derating in Infosys?Katri: A lot of companies in this space are already resetting guidance post earnings releases, so that should not be viewed as any surprise. There will be more to go. The actual impact here is maybe 10-20 basis points (bps) on growth. In the grand scheme of things, not a huge surprise, expect more and a lot of companies in the space already set up those expectations.Latha: You would not see any fresh reverses? Stock has already discounted you think?Katri: A lot of stocks in the group are factoring tougher visibility into the second half of the calendar year. I do not think anyone is factoring a disaster, but you will see one or two large clients here and there coming up with surprises for those companies. I am assuming some of those resets already factored that scenario. And that this is where we are. If things get worse, you will see another revaluation. You have seen a sell-off in the group, investors understand where we are, some of them want to hang in, some of them do not. But we had that discussion when Brexit came out, we are going to have a couple of tough quarters, you have tougher visibility and anything that has to do with financial services, you have industry that as it is, is going through a very tough transition, so it is an incremental risk to where we are right now.Sonia: What are your thoughts? Do you think Infosys’ FY17 guidance of 10.5-12 percent is now at risk and how much further do you think the stock could slide? It is already off almost 20 percent from its 52-week highs.Pai: The guidance was already at risk even before this event happened because if you look at the numbers that need to be delivered on a quarter-on-quarter (Q-o-Q) basis, even if it had delivered 5.5 percent growth in Q2, the company should have delivered 2-2.5 percent for Q3 and Q4, which would have been a very tall task considering the fact that the company has not delivered such numbers at least in the last five years in Q3 and Q4. So, the guidance was definitely at risk in my opinion.Yes, with RBS, this particular deal going away, the hit could be to the tune of maybe 30-40 bps for FY17 numbers. For FY18 numbers, the revenue hit could be in the range of something like 70 bps.In terms of stock, the stock is already factoring in an expectation that there is going to be a guidance cut, so the stock has underperformed Tata Consultancy Services (TCS) and even the IT index. The stock is down about 3-4 percent versus TCS’s performance of plus 12 percent and it is already trading at a 20 percent discount to TCS at this point in time. So, it is broadly pricing in a guidance cut.Latha: This is the first real casualty we are seeing of Brexit. Will there be more and should the market also now start discounting some negativity for the other IT stocks?Katri: This is the first casualty that we know of. But when Cognizant came out a week ago and reset guidance for the year, we are assuming that there are other casualties that we are unaware of. RBS which is such a large client, Infosys decided to be fully transparent and talk about this. There are other things that are happening behind the scenes that we are not fully aware of in terms of clients delaying, cancelling, terminating, maybe resetting, going through restructuring contracts, there is a lot of stuff that is going on because of Brexit and it is in the works.The real question here is whether this thing gets worse or not and at this point, I do not think anyone knows.Anuj: That is of course the larger question as well. We had Cognizant cutting guidance for the second straight quarter last week. Do you think the sector itself is at a risk of getting derated by a couple of notches?Pai: The sector has got derated. If you look at calendar year to date (CYTD) performance, sector is down maybe 0.5 percent whereas the Nifty is up about 9 percent. So, the sector has got derated.The only stock, which has delivered positive performance is TCS. We, as a house, have been fairly negative on the sector. We have been stating that over FY16 to FY18, we will still see single digit dollar revenue growth whereas the street is expected growth to bounce back to low teen kind of a number.So, FY17 will still be a single digit growth in dollar revenue terms and we think that FY18 could be far worse than what the current expectations are. We are expecting a mid-single digit kind of dollar revenue growth for the industry because we think the current macro weakness and this whole negative interest rate environment is not going to go away in a hurry.So, if negative interest rate environment is what is hurting banks -- especially European banks, be it from a net interest margin perspective -- I would probably think that that situation is not going to change in a hurry going into 2017.Sonia: For a long-term investor who has perhaps been in this stock for a couple of years, is this a time to give up or do you think that at some point, Infosys becomes a screaming buy?Pai: We think, on an absolute basis, there is probably downside to the stock, but if you look from a portfolio standpoint, while we would recommend the moderate underweight, we still think that Infosys and TCS and to probably some extent, HCL Technologies, these are three stocks I would probably say one should have in the portfolio.Relatively, compare to what expectations are, growth is going to come off. However, these are solid cash flow generating companies. Dividend pay outs can probably increase quite substantially from where they are right now.So, I would probably think that these are going to be steady, slow growing, high dividend paying companies in the future and they will find a certain space in the portfolio, especially if you look at the Morgan Stanley Capital International (MSCI) Index, IT is still up by 20-22 percent of the portfolio, so you cannot ignore this particular sector, you can be underweight the sector, but you cannot completely ignore it.