MindTree is trading at a PE multiple higher than that of Infosys. Am I missing something?
For about six to eight months, there has been a massive outperformance by the midcap IT names, aside the product and the platform companies where the rerating is 3-4x that of some of the large cap names.
Midcap names whether it is Mphasis or Zensar, MindTree, LTTS, Cyient have delivered 50-70% higher return than the largecap names and to justify this kind of a rerating, there has also been correspondingly higher growth on quarter-on-quarter basis and the outlook that the management has given is extremely good. But at this point, we feel that it makes more sense to focus on the tier-1 companies given their relative valuation attractiveness and tendency to narrow down the valuation differential over time.
There may be a patch, where the midcaps will continue to outperform but at some point largecaps will catch up and there is a lot of cash flow and a lot of comfort because of the buyback etc. We think that at this point, rather than chasing that momentum, it would make more sense to be with the names like Infosys, HCL Tech and TCS. There is going to be a lot of comfort from a one or two year perspective.
What is your expectation in terms of the fundamentals? For TCS, deal win is going to be in focus. Attrition is something that a lot of people are talking about. Infosys earnings will come later this evening, what are you looking forward to?
We are looking at Infosys to raise its FY22 revenue growth guidance and the overall commentary will continue to be very strong. The ISG call which happened yesterday showed people are extremely positive on certain categories in the IT services, particularly the managed services part. We definitely think that the environment is extremely good. We need to see what sort of strategy the companies would have to participate in the digital and cloud adoption opportunity.
Given that there is an underperformance and because of the TCS numbers, people are slightly more careful about what sort of growth can be expected from Infosys. So if we have even a minor positive surprise, people would be far more positive on these names because of the kind of comfort that they have on the balance sheet, on the buyback part, on the stability of the management etc. We continue to be quite positive on these names.
The latest updates on the new energy front and quite a bit has been announced over the past several months. In the Reliance AGM as well things seem to be moving on the ground with acquisitions being made. What are the valuations that you see and what is the target that you have for Reliance?
Earlier the focus was more on the Jio and retail business and the rerating around that for Reliance in the first leg. Now the focus is coming back to the O2C and more importantly this entire focus and the spree of acquisitions that the company is doing around green energy, solar etc. I definitely think that people will get a little more excited on O2C and the clean energy part of the business.
Both the businesses are shaping up extremely well and now that the company has strengthened its balance sheet with a large spree of investors and cash coming into the balance sheet, there is definitely a higher degree of comfort in terms of the company’s ability to manage these new acquisitions. We have a positive view on Reliance and our target price for Reliance is around Rs 2,850.
We are seeing discretionary consumption play in , and Indian Hotels. If one were to stick with the hardcore discretionary spend stocks, what is going on is beyond just reopening trade now?
Because of the lower base, people really started building in a much higher growth starting from this festive season and beyond and typically for some of the businesses, particularly hotels. So to some extent, the operating leverage starts peaking in a big way once we reach a certain threshold because of the growth delta being better and because of the lower market cap that some of these companies are trading at.
The retail investors would really want to participate in the momentum and the high beta plays. The entire theme is fitting extremely well and we think that once we have the volume and the growth numbers showing up, people will get far more confidence.
We are extremely positive on the hotels particularly Indian Hotels. Even airline companies they have run up. The fact remains that crude prices are at a very high level. Hoping that the crude price does not shoot up beyond $80-$85, Indigo is extremely well placed and of course some of the liquor names as the entire hotel going and parties and all that will pick up big time over the next three to six months. United Spirits is something that we continue to be very positive on. It might have run up a bit but there is far more to go over the next six to 12 months in terms of upside.
