Speaking to CNBC-TV18, Banerjee says the IT sector is likely to consolidate in the days to come.
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"With the employment scenario, the overall macro picture in the US gradually improving, IT budget of major fortune 500 companies are on the verge of getting increased- combining all these factors, it is too prolonged to see the IT sector remaining at the consolidation mode," explains Banerjee.
Below is the edited transcript of Banerjee's interview to CNBC-TV18.
Q: Is the market taking the US economy and the fact that Fed is tapering, is that too simplistic in terms of how the IT stocks have reacted. We have HCL Technologies at life time high and Infosys at life time high. What would be your approach in some of these names?
A: Since Q2 results the whole CNX IT has been in a consolidation mode. The rupee has also been consolidating around the 61.6-62/USD levels and Q3 that is the December quarter is typically a seasonally weak quarter for the whole sector because of higher furloughs. So, the whole sector has been stagnating but going ahead, if one looks at the duration from the month of February, March the whole market will start respecting FY16 numbers. There is a high possibility that the Nasscom growth guidance will get revised to around 15 percent from the current 14 percent. .
Also, if one looks at the very reason that US is looking forward to taper- with the employment scenario, the overall macro picture in the US gradually improving, IT budget of major fortune 500 companies are on the verge of getting increased- combining all these factors, it is too prolonged to see the IT sector remaining at the consolidation mode. Investors have started respecting that opportunity and this is the result.
Now, if we you look at specific stocks, there was definitely much upside left in HCL Technologies , it was trading around that sub Rs 1100 levels. Our price target is around Rs 1300 and definitely HCL Tech has been getting respect in this recent rally, it has moved up by almost 15 percent in over last fortnight.
Q: Can you give your specifics on Infosys as well as what you are expecting going into Q3?
A: For Infosys Q3 we are expecting a quarter-on-quarter dollar revenue growth of around 200 bps out of which almost 80-100 bps will be cut. If one looks at dollar index, it has been moving favorably for the whole IT sector. Even TCS management guided for a 100 bps quarter-on-quarter benefit because of the cross currency movements.
I expect margins somewhere around that 26 percent level but I will focus more on the prospects of FY15 and 16 rather than the near-term this quarter numbers for Infosys. If one looks at Infosys, over last six quarters they have been focusing towards those discretionary spending related consulting system integration platform domains rather than focusing on the rebid infrastructure or ADM (application development and maintenance) deals where HCL Tech and TCS has done a remarkable job.
So now if Infosys starts focusing on the high volume related segments, maintaining margin through the scale factor, through utilization improvement and the cost cutting exercise that Narayan Murthy has initiated, so definitely Infosys has the potential to reach the Nasscom guided growth levels of 14-15 percent rather than languishing at sub 12 percent levels. So shifting towards that 15 percent growth, maintaining a 26 percent margin along with risk of immigration bill gradually getting eroded, definitely Infosys has the potential to do well even from these levels.
Q: What would be your pecking order then in terms of the frontline IT names?
A: Pecking order top of the list will be Tata Consultancy Services (TCS) followed by Tech Mahindra, third will be Infosys. We were super bullish on HCL Technologies we since Rs 500 levels. I think that incrementally going ahead the margin lever in HCL Tech is no more there. Primarily, HCL Tech was a volume driven margin levered stock. Volume growth and revenue growth is already around that 15-16 percent levels. So, above Rs 1300 levels based on FY15, I don't see much upside left in HCL Tech. But if TCS, Tech Mahindra and Infosys are able to maintain margin going to their rebid deals, then they definitely would be better bets in the large cap space.
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