The IT space has been in focus post the earnings from Infosys, Tata Consultancy Services (TCS) and HCL Technologies. It has been a mixed bag with Infosys beating street expectations, HCL Tech missing on the topline growth and TCS missing the lofty expectations.
From fundamental perspective, Ankit Pande of Quant Broking prefers HCL Technologies and TCS, as they are more resilient as compared to Infosys.
Furthermore, in an interview with CNBC-TV18’s Menaka Doshi and Reema Tendulkar, he shares his insights on all three companies based on their quarterly earnings and where the companies are headed hereon.
Below is the edited transcript of the interview:
Q: How would you pick of these three at this point in time. Which company gave you the maximum confidence of continued good performance from a fundamental basis over the next few quarters?
A: From the fundamental point of view, HCL Tech and TCS, both of them continue to be our top picks and they are primarily in the outsourcing area. If you look at their exposure at the discretionary revenues, they are very little. TCS has some exposure to products and HCL Tech has very little exposure to products they have some exposure to consulting but that is probably very small. So from the fundamental perspective and of course leaving aside the quarter-on-quarter (QoQ) aberrations, these two companies continue to be most resilient and most favoured from our point of view.
But Infosys of course, can change their way of doing things their exposure to products and consulting we believe are somewhere in the region of 12-13 percent of revenues is pretty high. We believe that they can focus more on outsourcing and get the engine of growth going there at least. Again lever such as utilisation are very apparent currently including trainee’s there about 75 percent. We believe that they can head north of 80 percent.
TCS is at including trainee’s utilisation of a body at 82 percent. We know that HCL Tech reports their blended utilisation of about 83 percent. So this gives an idea that they have plenty of levers as far as operating margins are concerned and we know that they have been performing very poorly they can come back Dr Sikka new leadership is auger so they can also turn around and give some returns to the shareholder which haven’t been coming in the last three years.
Q: How quickly will Infosys catch up? For instance, if you strip out the Japan business and look at TCS on an organic basis, on a constant currency basis revenue growth has come in at 4.6 percent and Infosys has come in at 3.9 percent. So, that's not a very big gap for Infosys to bridge and if you look at just dollar revenue growth, Infosys is at 3.19 percent and striped of Japan the organic dollar revenue growth at TCS was 3.6 percent. Is it your estimation that now with this new leadership at Infosys, these gaps could be very quickly bridged by Infosys?
A: No, we shall not jump the gun on that. It is little bit of a tricky story. When you face the customer saying look I have great digital offerings and I will try and do something very new for you remember this classify as discretionary sometimes and very transformationary.
The clients monitor these this is something that we got again from the TCS. They monitor these from states to states and they build up the projects approval by approval and so this takes time. When the macro is pretty tough currently the pain is visible in retail but I am not sure that Banking and Financial Services (BFS) is something that can ever be out of the woods. When the pain is visible it can come back and bite you because discretionary is just that it is little bit hard to say that this will grow next to industry, close to industry because when the business cycle hits you then discretionary really falls off and the markets really rewards amongst those IT services companies. They reward growth rates a lot. So it is a very tricky question to say that Infosys is not on ground because their constant currency revenue growth is now close to matching TCS that's very hard to say it is just one quarter.
Remember that difference between TCS and Infosys versus HCL Tech is that HCL Tech does report steady q-o-q growth rates in Q3 and Q4 as well. Which you will not get from Infosys and TCS and both Infosys and TCS have said that the December quarter would be a soft for them. So we take all this in to consideration and we sort of advise a little bit of patience on that one.
Q: Of these three stocks, which one would you buy at this point in time?
A: HCL Tech would be our top because it has been an over corrected and 1,510 looks very attractive level. We will probably soon close to 1,850-1,900 target price on that one.
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