 "Q2 revenue growth numbers will be tepid: Harendra Kumar")
With Infosys kicking off the September earnings seasons Harendra Kumar, MD & Head, Institutional Equities, Elara Capital in an interview with Tulemino Antao shares his views on the broad trend for the markets, earnings of IT majors, banks, auto and the broader market. Edited Excerpts:
Markets have been an uptrend since the past few sessions. What are the broad trends do you see for top line growth in the second quarter for Sensex or Nifty group companies? What levels do you forsee for the Sensex or the Nifty for the medium term?
Revenue growth numbers will be tepid in the range of near 0/1%. EBITDA is 3.5% and net income is 4.6%. Disinflation in input prices will benefit margins but will weigh in the topline numbers, as pricing power is absent in the markets. Our Nifty target for the fiscal is 9200, which has been unchanged since January.
What is your call on IT majors Infosys and TCS post their September quarter earnings?
For 2 quarters in a row our analyst Ravi Menon has been able to gauge and highlight the fact that the undercurrent in Infosys's business model and slowing down in TCS's America business coupled with high attrition rates will lead to narrowing of valuation premium currently enjoyed by TCS over Infosys. Hence, he has been maintaining that clients should switch to Infosys from TCS.
TCS (TCS IN) growth at 3.0% QoQ in USD terms was below our estimates of 3.9% QoQ and at the bottom end of Consensus in the range of 3.0-4.1%. In CC, growth at 3.9% QoQ was slightly below our estimates of 4.2% QoQ, but CC growth slowed further to 12.0% YoY in Q2 from 13.1-13.6% in Q1 (excluding IT Frontier). TCS added USD59mn in revenue in North America in Q2, which is less than Infosys at USD65mn.
We raise our revenue estimates slightly by 0.2% for FY16 and 0.5% for FY17, but reduce our margin estimates on: 1) lower utilization and 2) higher sub-contracting costs. We value TCS at 20x (unchanged) September 2016E P/E and retain our TP of INR 2,590. We reiterate Reduce. Given our concerns on capacity limitations, margin pressure from lateral hiring and limited utilization lever, TCS should trade at a discount to Infosys, which we expect will match TCS on growth over FY16 and surpass it in FY17.
Some of the banks have already started passing on the RBI rate cut benefits to borrowers. What impact do you see on the net interest margins for the second half of the current fiscal?
Although the transmission of rate cuts has started happening there could be pressures on the margin front. Margin will likely fall in the range of 10 basis points. It is a big negative for non–casa banks and higher floating rate advances.
Apart from banks, do you see pick up in demand for home loans amid lower interest rates? What is your view on housing finance companies and the top picks in the segment?
Yes indeed. Although home prices remain beyond the range of the middle class we could witness some traction in the affordable range as EMIs would be lower in tandem with lower interest rates. We like LIC Housing Finance company in this space.
Among the auto pack, which is your preferred pick from passenger car makers and two-wheeler majors? Tata Motors has seen a sharp correction from February this year. Are valuations compelling at current levels and what would be your advice for new investors for a three-year holding period?
Many of the auto majors are all set to launch new models both in the passenger car segment and the two-wheeler segment. In the passenger car space Maruti Suzuki is our to pick and Hero MotoCorp in the two-wheeler segment. Yes, Tata Motors has nearly lost 50% of its value from its highs in February. Although the stock is likely to rebound from lower levels the upside for the stock is capped closer to Rs 400.
What is your call on telecom stocks at current levels?
We like telecom stocks as we are structurally positive on convergence and India’s data story. Increasingly, the industry is getting consolidated and incremental revenue market share is going to the top 3 incumbents, which is a big positive.
With recent data indicating easing of inflation what is your take on the FMCG sector? Which would be your top picks in the mid-cap FMCG space?
Consumption is a structural story with falling inflation and more Jan Dhan accounts being seeded into the economy. Godrej Consumer, Marico, Emami are some stocks that we like.
In the mid-cap and small-cap space, some stocks are witnessing buying interest on correction. Which would be your top picks in the broader market for a long-term investment of 3-5 years?
The action is the broader market is seen in fundamentally sound stocks and those which are indicating growth potential going forward. We like Tata Communication, Indian Hotels, Raymond and gas-based stocks such as Indraprastha and Petronet LNG.
