IT stocks have been gradually making a comeback as the dollar is strengthening. What is your strategy with regards to tech stocks?
IT and pharma are the two sectors which are looking very positive largely because of the virtualisation of the business that is expected to happen. Within that, we have companies like
where the deal wins have been pretty good. We would expect companies like Infosys to deliver 14% dollar revenue growth over the next two years trading at about 20% discount to TCS. That is the top pick in the IT space.
Beside that, we like Birla Soft with a target price of Rs 310. The company is trading at about 15-16 times and is expected to deliver 9-10% dollar revenue growth with the margin expanding. In general, we are positive on IT as a space but today’s news in terms of hiking tax rate will have no impact on the near term EPS for FY23.
But from FY24 onwards, there will be some impact but largely you really do not get the kind of breakups. It is largely European operations but having said that, we expect companies like Mastek which gets 75% of revenues from the UK could be impacted. Also, First Source, with about 30% of the revenues from the UK and Tech Mahindra with nearly 25% revenue from the UK could get impacted.
But structurally, we would expect the deal wins will keep getting better and with better execution, going forward, IT is one of the sectors that will continue to deliver good. In the last 10 years, they have outperformed most of the sectors.
Would you be looking at any of the Adani Group names?
We have Adani Gas under coverage. We like it largely because it is the only Pan India player which is expected to do very well on the CGD side of the business. Then there is MGL and IGL which are largely focussed on a certain territory.
Adani Gas has got a large landscape to cover but the challenge is that this company trades quite expensive. We have seen a good runup in the stock but from a structural perspective, we like it. Also, within Adani, we are looking at Adani Ports largely because our sense is that the DFC will get started from 1st April 2021 and that will be a good tailwind for the entire or some of the logistics players like Gujarat Pipavav Port, Concor and Adani Port.
We like these companies in the logistics space. As manufacturing is expected to pick up, Adani Port is building up huge capacities. From a longish perspective, it is a good annuity kind of a business. Valuation-wise, these companies offer good long-tail opportunities. We like the entire space including Adani Ports.
IT stocks like TCS, Infosys, or Wipro are trading above their 3-4–year band, at a premium. So, the constructive scenario which you have painted may be already in the price?
You are right to some extent. What also needs to be seen is that IT as a sector was growing at 8-9% odd but now in case of tier one companies, the growth rates will be elevated to 14-15% range. Going forward, the deal size is likely to get bigger and that should provide a decent tailwind in terms of growth. So, there could be elements of positive surprises there and besides that, margins are expected to remain elevated despite some of the companies facing challenges in terms of manpower.
From that perspective, IT still looks good and can positively surprise. I do not think we will see a reversal of this trend even with the expectation that largely things will normalise in the second half especially in a big country like the US.
Is there merit in buying a Canara Bank, a PNB or for that matter Union Bank from the PSU space? If the corporate banking logic applies to SBI, it should also apply to others.
SBI stands apart from rest of the PSU banks largely because of the construct of their overall advances. Their home loan book is one of the biggest and their asset quality concerns are far lower — in mid single digits — compared to double digits for most of the PSU banks.
In other PSU banks, even for example in BoB, even after the fund raising, we have seen book value going down because of the dilution happening and the same thing could pan out for others also. So among the rest of the PSU banks,
looks interesting to us largely because we would want to believe that that is one of the few banks which can eventually get divested. That is where we would be more keen on looking. That is one of the few banks which we can look at. For the rest of the PSU banks, the problems continue even after raising funds.
They will continue to lose market share. The dilution in the book is going to be far higher because all of them are trading below book values. While there is a good momentum, structurally I would not be chasing any of these names. Bank of India could stand apart if we gather more information on when it can get divested.
Which are the three stocks where you have seen maximum retail participation on the long side and three stocks where retail investors are selling or going short?
I really do not have a cut like that to say which retail stocks have the highest retail participation and vice versa. I really do not have an answer for this question. But our sense is that as things stand, we have seen a good positive surprise in this quarter and it can still surprise on the positive side. The case in point is say paint. While the overall revenue recovery has been good, our view is that it is not only pent up demand which is going to be the driving force.
From that perspective, we could see earnings surprising on the positive side. Liquidity is also expected to remain good. Even as the bond yields have gone up in the US, it is a good problem to have, largely because the bond market is also looking at the normalisation of the US in the second half of this calendar year.
Even if the bond yield rises, it is a bit of a competition to equities now but structurally, we would see big challenges for the markets. Shallow corrections can happen but structurally midcap and smallcaps are looking particularly attractive given the fact that they have not really performed that well. That is where we will see the maximum earnings surprises and upside potential as well.
Where do you stand on the entire AMC investment thesis? Do you believe that these are stocks for the long haul?
Our view is that a lot of these AMCs have been witnessing outflows and largely most of the portfolio orientation is also towards value-oriented stocks. That is where the challenge lies in terms of some of the flagship companies or flagship schemes. They have not been performing to the desired extent.
I would prefer more life insurance companies to AMCs in the non lending space. Insurance is something where we expect the ticket sizes to go up. We like that space more compared to AMCs.
