Given the strong management commentaries, can one buy IT stocks afresh now?
As a sector, we are neutral on IT. One has to be very stock specific to be able to outperform. The IT index has broadly delivered returns in line with the index on a YTD basis. Largecap IT companies like TCS, Infosys and HCL Tech would deliver anywhere between 13-16% US dollar revenue growth in FY22 and that may taper off by 200-300 basis points in FY23. The visibility beyond FY23 is a bit challenging right now. The managements are saying that this is going to be a multiyear growth phenomenon but they are not sticking their necks out and giving any numbers.
On the midcap side, the consensus view is that they may post high-teens kind of dollar revenue growth in FY22. The challenge now is visibility beyond FY23. If you look at FY23 numbers, a lot of stocks are trading at fair valuations. I would probably pick HCL Tech and Tech Mahindra from a valuation standpoint. They look interesting bets from a 6-12 months perspective. The only midcap stock where I would be bullish on is Persistent Systems. TCS and Infosys are mispriced to some extent.
What has been your last big upgrade post earnings season in the companies you track?
The second wave has led to some amount of correction in financial stocks and the pain is going to be shallower and transitory. In the next 3-5 years, the earnings trajectory of banks is going to be very different from the last five years, especially because a lot of the asset quality problems are going to be behind us. Once the economy bounces back, credit growth is going to pick up. So we are very bullish on banks. We would pick ICICI Bank, IndusInd Bank and Axis Bank.
The other sector we are bullish on is the consumer discretionary side. Consumer discretionary stocks in hospitality, film exhibition or retailing side got hit for obvious reasons and will see cuts in FY22 earnings. But if you look beyond the first half of FY22, the business is going to come back up and valuations are fairly interesting. Indian Hotels, INOX Leisure, PVR, Bata and V-Mart are interesting stocks to look at from a 12-18 months standpoint.
How are you approaching the PSU pack?
We are positive on PSU oil companies – HPCL, BPCL, Petronet LNG and GAIL – the entire lot. We do not track upstream companies like ONGC or OIL but the downstream companies look very interesting. The results of PSU OMCs have been fairly strong. Even if you take out inventory gains, GRMs have been a little better than what we anticipated. Obviously, it looks like BPCL is being made ready for divestment. They have gone out and divested some of their holdings in their associate/subsidiaries and the very large dividend that they gave out this time indicates that it is getting ready for divestment. It should be positive from a valuation standpoint. BPCL divestment will drive valuations of other companies. So within the oil PSU pack, we like Petronet LNG a lot. We think there is a lot of value there.
