Dipen Sheth, head-institutional research of HDFC Securities, said that the only information technology major that his company has a buy call on is HCL Technologies, in an interview with CNBC-TV18.
“I don’t think I am going to take a call on India based on what happens to luxury housing. It is like trying to figure out what is happening in the country based on how many BMWs are sold,” he said.
“If there is a breakdown in faith, if there is a breakdown in trust, if you guys are not playing the game by the rules — look at financials, pharmaceuticals, there are stringent rules in all these sectors — the fear is the prices are telling you that the investors fear that there is again misbehaviour on a large scale or non-compliance on a larger scale than we might have thought,” he added.
On IT behemoths Tata Consultancy Services (TCS) and Infosys, Sheth said: “We have now got neutral calls on both of these leaders. We are disappointed with TCS because we have been thumping the table for a while on them, believing in their superior growth trajectory and it was only a matter of time before that growth should have come back but it hasn’t.
"The slowdown in headline growth from 13-14 percent to 8-9 kind of number looks sustainable. So this is sticky. I don’t think TCS is going to get back to 12-13 percent growth in a hurry. That is the vibe we got from the company on the conference call and if that is the case then 24X looks rich, which is why we have downgraded them from 24X to 20X."
He continued: “Infosys we are still at 18X and look at that big gap that was there and we still have a neutral on Infosys. We do like the fact and we had a buy for the longest time on the stock but much of the improvement in the growth trajectory is baked in the price. That margin uptick that you saw has got everybody excited. We believe that the pricing environment is not exciting.
"Many of their large wins are essentially renewals, which means there would be pricing pressure there as well. It is a great company, they are doing all the right things, there is no denying the fact and both these companies are paying out anywhere between 80 percent and 100 percent of free cash flow (FCF). However, the growth numbers are not exciting enough for us to thump the table on valuations."
Sheth added: “On frontline IT, the only buy that we have right now is HCL Technologies.”