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    What to expect from Infosys, HCL Tech Q3 results today

    Synopsis

    “Coming to the IT sector, there will be differentiation in a lot of IT companies in terms of which companies are really adding value, seeing vendor consolidation and managing how they are able to get the freshers because that takes two to three quarters and addresses other supply side pressures.”

    Gurmeet Chadha-1200ETMarkets.com
    “I personally think that one should not get carried away with one quarter, two quarters’ results. If there is any aberration in the deal momentum and if one looks at their Cloud or digital business, iIt now accounts for 58%. In the last quarter, the Cloud business clocked about a billion dollar of the $4.5-4.6 billion revenue Infosys did. Also, now Infosys trades at more reasonable valuations of about 20, 21 times and HCL Tech at 16-17 times,” says Gurmeet Chadha, Managing Partner & CIO, Complete Circle Consultants

    What is your key takeaway from TCS and what are you henceforth expecting from Infosys and HCL Tech?
    The numbers are more positive than what the expectations were. We have been working with the noise in the US and Europe. In the case of Infosys and HCL Tech for example, the Europe mix is between 25% and 30%. So that commentary would be important. Infosys also highlighted some weakness in the hi-tech retail and mortgage business within financials. We will probably look at that because BFSI is a large part of the revenue.

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    I personally think that one should not get carried away with one quarter, two quarters’ results. If there is any aberration in the deal momentum and if one looks at their Cloud or digital business, iIt now accounts for 58%. In the last quarter, the Cloud business clocked about a billion dollar of the $4.5-4.6 billion revenue Infosys did.

    Also, now Infosys trades at more reasonable valuations of about 20, 21 times and HCL Tech at 16-17 times. There was a time when people were saying that IT is the new FMCG. Those are the times one will have to get worried, where one tries to just extrapolate the Covid-led performance. Also, there will be differentiation in a lot of IT companies in terms of which companies are really adding value, seeing vendor consolidation and managing how they are able to get the freshers because that takes two to three quarters and addresses other supply side pressures.

    One has to be selective in companies which are more run-of-the-mill IT services. The risk reward in a few pockets is pretty good.

    From what we can see on day one, it seems like they are all vying for a space of the EV pie for sure but ICE engine models as well or launches continue alongside. Just wanted to understand who you think is going to win the EV game?
    We have to look at it more holistically and not just confine it to EV. We do not know how this entire thing will play out. Amongst four-wheelers, M&M clearly is standing out. Their SUF market share is already touching 20% and as they have indicated they want to regain 25% plus market share, five back to back successful launches including the recent they have launched a Thar variant again which is very competitively priced.

    You have the EV thing which is SUV 400 coming up. I also think the tractor business should do better in the second half of the year. The first half was pretty soft despite having gained market share so now upwards of 41-42%; farm equipment are doing very well, the export part is doing well and they have shut down all the loss-making JVs. They have a decent capital allocation as well and still trades pretty reasonable at about 17-18 times.

    In two-wheelers, TVS is doing better than Bajaj and Hero, their iQube is now 10,000 units inching towards that per month, they intend to take it up to 25,000 units and a very good mix on exports and premiumisation etc which is playing out. We like some auto ancillaries also and if CV cycle picks up, there will be a few more names added. We are looking at some specialty steel names also who are suppliers to automobiles. You have to play the sector holistically.

    I think that again as I said for IT you have to pick your bets and it is to be more holistic in terms of-- EV is still a very small part of the overall revenue mix and is likely to remain so for at least the next couple of years.

    How is the telecom sector going to shape up, especially with the 5G rollout which is going to be the likely winner in that sector?
    Near term, in the case of Bharti, ARPUs are going up incrementally every quarter, we are almost at 190 kind of ARPU and I think eventually you will see Rs 220-230 hopefully in the next couple of quarters as 5G rollout gathers pace. Also, if you see there are two circles where they have withdrawn the minimum recharge of Rs 99 as a pilot in Bihar and Haryana if I am not wrong. That also tells us the intention behind getting the ARPU up. They are monetising their Airtel Payment Bank.

    It is the only payment bank which is profitable and was the first to get the payment bank license in 2016 if my memory serves me right. The Africa business has stabilised, the home and enterprise segment seems to be doing well and I think after a lot of time, we are seeing that the EBITDA and the cash flows they make in a year are exceeding their annual payout which are due to AGRs and other spectrum liabilities.

    That means that they can deleverage the debt which is one concern right now on Airtel. It is almost Rs 2 lakh crore, maybe a shade less. There are multiple levers there and now with almost two and a half players. With the way Vodafone and BSNL are, it looks like for some kind of a rerating in the stock in the near term.

    If I had to ask you to take your top bet – any sector, any stock – what would that be?
    As I said, this is probably the first quarter of the year which is slightly challenging. I think banks are looking good for a few more quarters of credit growth. I have not seen a 15-18% credit growth across banks but again one has to be a little selective.

    So, go for banks which are matching the liability growth, keeping an eye on the cost of funds, something like Axis Bank, which was a little more modest when the turnaround started from FY19 to FY22, where they grew the loan book to 12-13% and are now pressing the pedal at 17-18% granular mix. Their cost to asset ratios is likely to be around 2%. The asset quality is good, fee income is catching up, retail deposits which is CASA is almost 82%.

    I think focus on the liability side also along with the credit growth that we are seeking is where the differentiation will happen. We will stick to some of the mid-sized banks also which look good like IDFC First, etc, and also like Adar Poonawalla in the NBFC space. It has recently got AAA rated, the cost of funds have declined by almost 250 basis points from upwards of 9% to sub-7% now.

    They are talking of Rs 50,000 crore loan book in next three years which is an excellent growth of maybe 30% plus and they are developing a good digital ecosystem and because of the base being small.

    I also like a few manufacturing names in defence, in chemicals, specially fluoropolymers and some selective names in textiles as well.

    Tyre is going to be a multi-year story at least for two years, if not shorter than that or longer than that. What is your own take on tyre names?
    I think market cycles have shortened so much that you have to think twice before calling anything multi-year. The money is moving very quickly. Look at the way the IT stocks and pharma stocks have taken a beating after being the darlings of the market in 2021.

    Overall in auto, the momentum still looks good with new model launches and premiumisation playing out. Commodity prices are coming off and chip issues are improving. The sector is headed well in my view and I would stick more to the OEMs in terms of starting with four wheelers and then looking at guys with more kit value per car, the likes of Minda, etc. I will look at tires selectively, maybe Apollo. We are more overweight on some of the OEMs and ancillaries which I named earlier in the show.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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