Prefer TCS, HCL Tech over Infosys: India Infoline

Axis Bank too is an attractive buy at the current price provided the asset quality trends in line with the guidance given by the bank, said Mehta

Also read: Lower WPI may help mkt hold 6220; buy ITC: IIFL 

Below is the verbatim transcript of his interview on CNBC-TV18

Q: First I am going to ask you about Infosys because it is at a fresh high. The stock is 3 percent higher now. Post the numbers what is your recommendation?

A: We have a buy recommendation and we have raised our target price pretty significantly from Rs 3750 to Rs 4132. That is also been because we have rolled over our estimates in price to earnings (PE) multiples to FY16 earnings. We think that Infosys is a good story evolving especially on the margin front. We think that the worst of the margin headwinds are behind and margins should expand each year in FY15 and FY16 by 100 bps or more. So, that should drive a good earnings growth.

Currently we are projecting 16 percent earnings Compounded Annual Growth Rate (CAGR) over the next three years. We think that it is deserving that stock trades at, at least a price/earnings to growth (PEG) ratio of 1 which is why our multiple is also 16 being assigned to the earnings which we are looking at Rs 260 for FY16.

Q: The second thing is can Infosys bridge some more gap between itself and Tata Consultancy Services (TCS) in terms of valuations and what would be your own pecking order in terms of some of these IT names?

A: Ofcourse there is a scope to do that but that would entirely depend on how FY15 pans out and whether they are able to bridge the gap in revenue growth and more importantly, in confidence of their commentary with the peers like HCL Technologies and TCS. So currently, till that happens our pecking order is that we prefer TCS and HCL Technologies over Infosys and Wipro.

However, we think that Infosys is a good story which is evolving and if the margins continue to trend upwards which we think should be the case and if the revenue growth starts accelerating from first quarter FY15 then even Infosys has got a substantial upside from the current levels.

Q: We generally tend to ignore some of these midcaps or some of these larger midcap IT companies; I mean phenomenal run for names like Tech Mahindra, etc, in the midcap bunch what would your top picks be?

A: Given that the midcaps have had a significant run or an amazing rally in the last three to six months - the current risk reward, we believe that MindTree can continue to do well as well as KPIT Technologies.

KPIT is purely a valuation call given the fact that it is a least priced stock amongst our coverage universe. We think that over there again the margin improvement story can actually unfold over the next few quarters.

Q: IndusInd Bank in particular has been underperforming. What is your reading of the numbers and do you think the market is overreacting?

A: We are bullish on IndusInd Bank. We think that the numbers were a mixed bag. However, at this point in time the market is more focused on potential risks to asset quality and deterioration and that is why we saw the kind of reaction to IndusInd Bank because of a slight deterioration in the asset quality caused a steep correction.

However, if you look at a more longer term that is beyond a couple of quarters then in that case, given the fact that wholesale rates have softened and would remain benign we think that margins of IndusInd Bank could elevate to 3.8-3.9 percent and that would give the bank sufficient cushion to absorb any negative surprises in asset quality thereby retaining their return on assets (ROAs) at 1.8-1.9 percent. So, we think that the recent underperformance of the stock and if there is a steep correction even from the current levels, will be a great opportunity to get into the stock from a medium to long term perspective.

Q: Within the same space if we do see some other private sector banks perform slightly badly in terms of asset quality then which are the ones that you would buy on a dip, where you would have the same confidence that you have on IndusInd Bank?

A: We are also looking pretty closely at Axis Bank. We think that the stock has corrected from the recent high. If the asset quality trends inline with the guidance which the bank has given, then in that case we think that at the current price at about 1.3 times FY15 price to book, it is an attractive buy.