Bhavin Shah of JP Morgan said the Software Technology Parks of India (STPI) extension in the budget will benefit companies by 3-4% in FY11. He sees limited upside in Infosys but finds TCS still undervalued.
On the Q1 results of IT companies, Shah said he does not expect big surprises from IT this quarter. "IT companies are likely to see low single-digit revenue decline. We expect margin erosion based on hedged positions and would look out for the Q2 FY10 outlook." He sees some resumption of growth in Q2 FY10.
Speaking on Infosys' Q1 numbers which are expected tomorrow, Shah expects some margin erosion on visa; and selling, general and administrative costs. "We see a better chance of upside in dollar revenues."
He does not expect a meaningful diversion from guided EPS. "We see FY10 and FY11 EPS at Rs 106.5 and Rs 126.8 respectively."
Shah does not expect Infy to increase its full-year guidance. "We may see some guidance revision from Q3 FY10."
Here is a verbatim transcript of the exclusive interview with Bhavin Shah
Q: Will the Software Technology Park of India (STPI) extension in the budget change your forecast at all for the next year?
A: I believe the government has essentially answered most requests from the technology sector. I think the extension of STPI should help different companies depending on which company you are looking at, maybe from a marginal impact to 3-4% benefit in FY11.
While Fringe Benefit Tax (FBT) is not a big number, it suddenly removes some of the procedural headaches, so some small benefit from there as well. Also, there is some simplification on the service tax related matter for export companies. I think there are multiple things that seem to have been addressed.
Q: Before we speak about Infosys specifically, tell me what are you expecting from the IT sector per se during this quarter?
A: We don’t expect any big surprises from this quarter itself. I think we are going to see anywhere from one to low single to mid-single digit revenue decline depending on how well some companies are hedged and obviously some small rupee appreciation, So depending on that, you will see some margin erosion. Also, some companies have one-off cost in Q1 like visa and selling, general and administrative expenses (SG&A). So, that itself is not going to be a big surprise. I think what companies come out and say about the September quarter is going to be a lot more interesting. We do expect companies to talk about resumption of some sort of growth in the September quarter, not a huge growth but some sort of low single-digit growth.
Q: What about Infosys specifically, do you expect it to change its guidance at all for the full year tomorrow?
A: We do not expect them to increase their yearly guidance. While there is slightly better probability of an upside to the revenues on a dollar basis, I think they will probably keep in mind some sort of the rupee appreciation as well. So, it is unlikely that we see any material change to their full-year guidance. For the September quarter, we expect a low to mid single-digit kind of growth outlook.
Q: What are you going with in terms of rupee EPS number for the full year?
A: We have Rs 106.5 for FY10 and Rs 126.8 for FY11. Our FY10 earnings per share (EPS) is above their guidance. We don’t think that there is going to be any material change to their guidance this year, not yet. Maybe come October they could consider further revisions.
Q: What’s your general call on the sector now? Do you have buys out on most of the top stocks in coverage in the IT sector at current prices?
A: We like the sector in general and do believe that over the last several months with a slowdown in demand there has been a fair bit of slag that has been developed in the system. Companies will be able to hire people a lot more easily over the next couple of years. In the meantime, we have had increase in capacity in terms of engineering costs. So, the labour pool availability is going to be significantly improved over the next several years. As far as the demand goes, obviously we have experienced some slowdown. The general offshore trend remains pretty firm. So, we continue to be overall positive on the sector. When you think about individual stocks, Infosys has done well and we have limited near term upside for Infosys per se. We do think that TCS still remains somewhat undervalued and so expect higher upside on TCS. We obviously have Satyam. On this one, we expect meaningful upside and have an Rs 100 price target on Satyam.
Q: What about midcaps. You just alluded to Satyam, if you come down from Infosys, TCS, Wipro and HCL Technologies, how do you look at the next rung in IT now?
A: When I look at the target price versus current share prices there has been a fair bit of improvement in the midcap stocks as well, so that is why we continue to focus on companies where we still feel that there is meaningful upside. I think Satyam and Tech Mahindra come to the mind. There is significant room for margin improvement in Satyam. If you look at it from an FY11 basis, those two looks particularly cheap.
Q: Give us target prices both for Satyam and for some of the other stocks under coverage for you now?
A: We continue to think of meaningful upsides on Satyam. Rs 100 price target versus Rs 70 current price, so that is a pretty big gap. TCS is another one which we find somewhat undervalued compared to Infosys and Wipro. We have an Rs 550 price target on TCS, so that is another one that we would recommend.
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Thursday, July 9, 2009
Budget By Udayan Mukherjee
A game of patience
Hope is a dangerous thing, as investors found out yesterday. If the Finance Minister was guilty of presenting an insipid budget that was low on the detail that the market wanted, investors too were perhaps guilty of expecting too much, too soon. That doesn't absolve the Finance Minister of a budget that is low on ambition, boldness and vision but at least it teaches investors to not hope for the moon going into a policy event.
The real damage was done when the FM spelt out the 6.8% deficit number implying a large market borrowing programme with little detail on how he "would get back on the FRBM path". Global rating agencies will pass their judgement in the next few days but the bond market didn't wait that long. The benchmark bond yield shot past 7% raising fears of interest rate spikes and triggering off a collapse in stock prices. At a macro level, that perhaps was the undoing of the market. At a more micro level, a lot of sectors had run up expecting substantial boosts from the budget. Education, real estate, textile and fertiliser stocks which had meaningful rallies leading up to the event collapsed completely . The surprise was Infrastructure, where stocks sold off as well, as apart from an increased outlay for the NHAI the budget was a bit low on bold moves.
Then there was disinvestment, which the market had pinned some hopes on. The pitiful Rs 1100 crore figure which the FM unveiled dashed those hopes. That number is truly inexplicable.
Not that this budget had nothing postive for the stock market and corporate India. The scrapping of FBT, extension of 10A/10B for IT companies, removal of CTT and no rollback of excise cuts were all positives, partly offset by the hike in MAT. The scrapping of the surcharge on personal income taxes may even be a limited consumption trigger. Tobacco companies were spared the axe this time and ITC was one of the few stocks that ended in the green, contrary to investor fears.
Yet what the market wanted was a green signal, that finally the drought on reforms is over. That a government, shorn of the Left, will press ahead with bold policy moves. The charitable view is to accord the FM the benefit of doubt : he didn't have enough time to unveil a big bang budget and the best is yet to come, over the next few months and in the next February budget. The cynical view is that the market is running ahead of itself; despite the electoral surprise, things will improve only incrementally and over a much longer duration than investors want. The truth, as often, perhaps lies somewhere in the middle. While investing in India, the virtue of patience cannot be overstated.
Hope is a dangerous thing, as investors found out yesterday. If the Finance Minister was guilty of presenting an insipid budget that was low on the detail that the market wanted, investors too were perhaps guilty of expecting too much, too soon. That doesn't absolve the Finance Minister of a budget that is low on ambition, boldness and vision but at least it teaches investors to not hope for the moon going into a policy event.
The real damage was done when the FM spelt out the 6.8% deficit number implying a large market borrowing programme with little detail on how he "would get back on the FRBM path". Global rating agencies will pass their judgement in the next few days but the bond market didn't wait that long. The benchmark bond yield shot past 7% raising fears of interest rate spikes and triggering off a collapse in stock prices. At a macro level, that perhaps was the undoing of the market. At a more micro level, a lot of sectors had run up expecting substantial boosts from the budget. Education, real estate, textile and fertiliser stocks which had meaningful rallies leading up to the event collapsed completely . The surprise was Infrastructure, where stocks sold off as well, as apart from an increased outlay for the NHAI the budget was a bit low on bold moves.
Then there was disinvestment, which the market had pinned some hopes on. The pitiful Rs 1100 crore figure which the FM unveiled dashed those hopes. That number is truly inexplicable.
Not that this budget had nothing postive for the stock market and corporate India. The scrapping of FBT, extension of 10A/10B for IT companies, removal of CTT and no rollback of excise cuts were all positives, partly offset by the hike in MAT. The scrapping of the surcharge on personal income taxes may even be a limited consumption trigger. Tobacco companies were spared the axe this time and ITC was one of the few stocks that ended in the green, contrary to investor fears.
Yet what the market wanted was a green signal, that finally the drought on reforms is over. That a government, shorn of the Left, will press ahead with bold policy moves. The charitable view is to accord the FM the benefit of doubt : he didn't have enough time to unveil a big bang budget and the best is yet to come, over the next few months and in the next February budget. The cynical view is that the market is running ahead of itself; despite the electoral surprise, things will improve only incrementally and over a much longer duration than investors want. The truth, as often, perhaps lies somewhere in the middle. While investing in India, the virtue of patience cannot be overstated.
Calls for the day 9th july
RESEARCH -Nifty (FUT) R-4125/4185/4275 S-4085/4030/3995 ;Sensex (CASH)
R-13970/14170/14510 S-13835/13630/13495 ;MARKET OUTLOOK:
VOLATILE)(09.03A)
12:11 PM 7/9 RESEARCH : INTRADAY CALL ( CASH ): BUY ABB ABOVE 715.50 TGT 735 SL 705
1:12 PM 7/9 RESEARCH : INTRADAY CALL ( CASH ): BOOK PROFITS TRIVENI
R-13970/14170/14510 S-13835/13630/13495 ;MARKET OUTLOOK:
VOLATILE)(09.03A)
12:11 PM 7/9 RESEARCH : INTRADAY CALL ( CASH ): BUY ABB ABOVE 715.50 TGT 735 SL 705
1:12 PM 7/9 RESEARCH : INTRADAY CALL ( CASH ): BOOK PROFITS TRIVENI