Trideep Bhattacharya at UBS believes that the valuations of the frontline technology companies are attractive and says that there is great buying opportunities in largecap stocks like Infosys and Tata Consultancy Services.
UBS has a price target of Rs 3,700 for Infosys, target of Rs 2,170 for TCS and Rs 740 for HCL Technologies.
He further adds that rupee-dollar should remain in a tight band for CY06 and that will benefit IT companies.
Excerpts from CNBC-TV18's exclusive interview with Trideep Bhattacharya:
What are your thoughts on where valuations for frontline companies like Infosys, TCS, Wipro have reached after this correction?
We actually did an analysis, which looked at where the valuations are, particularly with regard to where they have traded in cyclical upturns and downturns. We came out with a conclusion that the tier-I companies like Infosys, Wipro and TCS have traded in the band of 20-25 times and if one looks at the valuations today, it is trading at the bottom end of that valuation chain.
So clearly the markets are factoring-in the doom stage scenario, which based on our channel checks, on what we hear from the companies and also from what we expect from June quarter results don't seem to be the case.
So if one puts together what fundamentals are saying and where valuations are at the moment, it looks to me that this is a great buying opportunity, particularly largecaps like Infosys and TCS.
There have been some concerns like the possibility of global economic slowdown and how that could impact the order flow of some of the larger majors, any substance to that fear?
Yes, with inflation going up and with rates following suit. But there is a risk that global crude might actually slow down but at UBS, we are saying that we will not enter a recession but we will see a mild slowdown in the growth rates of the US GDP.
Our forecast is that the growth rate for CY06 in US GDP will be 3.3% as opposed to 3.5% that we saw in CY05. Under such circumstances the IT companies should stand to benefit because there is an increasing need for outsourcing as long as growth remains in a particular channel.
If we do get into a recession or something as drastic as that, then we clearly see the risk in terms of order flows slowing down. But with respect to what we see in terms of how we forecast the US economy the way it should be CY06, we don't see that risk panning out as in the minds of some of the investors.
And even if that be the case, we believe that even if assume that in the worst case they just about meet their guidance's, even then the valuations are at the bottom-end of the channel, of 20-25 times or rather closer to 20 times.
Whichever view one takes, it looks like the markets are factoring-in worst-case earnings estimate, but I think things are better than that. They are also factoring-in the worst-case valuations, which means a US recession but I think the overall market should do better than that. So in both these circumstances, if one puts together what the fundamentals are saying, we think the stocks at current levels will give you about 30% odd returns over the next 6-9
What is your top picks, amongst the frontliners at UBS and what price targets have you set out for them?
My top pick will be Infosys, with a price target of Rs 3,700, followed by TCS with a price target of Rs 2,170 and HCL Technologies with a price target of Rs 740.
Do you track midcap stocks MphasiS-BFL and how have you read the news with EDS now?
I think this is more driven by technical near-term factors rather than the fundamentals driving the stock at the moment, the way the stock has come-off after the open offer closed.
Overall, if we look at from the EDS's takeover of Mphasis-BFL point of view, it looks to me like a drastic move by EDS to get something going in offshore. But at the same time from an Mphasis-BFL minority shareholding perspective, the open offer that EDS came about meant about 66% or rather adoption ratio in terms of the total number of shares that got accepted.
In such a case what happens is that the rest of the minority shareholders have no near-term triggers and hence one was seeing a correction in the market, which has come through over the last 1-2 weeks.
I think midcaps in general will come back with a lag because in the fall that we have seen so far, lot of investors are caught unawares and have not got an exit. So I think midcaps would recover with a lag and the first stocks, which should do well will be the largecaps. Once the largecaps reach a particular level then one could see a recovery in midcaps coming through, even though the valuations of some of the midcaps look interesting.
What about Satyam Computers?
Satyam Computers is another bet that we have a buy recommendation on, but keeping near-term in mind I do not think that the stock over the next 6 months or so might do significantly great. I think over the 9-12 months category, if you look at that type of a horizon, then I think the stock will come back.
There are some concerns on wage inflection impacting the margins in June or the September quarter. Till the time that gets out of the window, I think the stock might remain quite volatile. But having said that in absolute terms the valuations are interesting at 15 times, one-year forward and investors with their holding period between 9-12 months should look at the stock with an expectation that it will be a second half loaded stock price performance that will come through.
One final word on the rupee and how you are gaming it given this recent volatility and impact on the tech companies?
Actually the guidance of all the companies when they came out in April quarter was at 44.5, if you look at the currency, it is today at roughly around 46. They stand to gain from the depreciating currency, which is a positive. Over the long-term horizon, I think what we are saying at UBS is that the currency should remain in the current tight band for the rest of CY06.
On net balance, currency this year should stand to benefit the Indian IT services companies rather than going against it like we saw last year.
Disclosures.
No.
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