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Infosys long term play; all eyes on Sikka’s guidance: Pros

With  Infosys all set to announce its second quarter numbers on Friday, the stock tanked almost 5 percent intraday on Wednesday. Times like this, the big question in the minds of the investors is should one buy the stock ahead of its results.

Earlier today, Citi downgraded the sector to neutral from overweight on October 1. It also downgraded Infosys to neutral.

Ajay Bagga, executive chairman at OPC Asset Solutions believes Infosys to be a good long-term buy. However, he says, maybe investors should avoid buying the stock ahead of earnings. “All eyes will be on the 12-18 months guidance that will be given by Vishal Sikka on Friday,” he adds.

Also Read: Turning around Infosys: Vishal Sikka’s action list so far

It has been a little over two months since the former SAP executive Vishal Sikka took over the reins of Infosys, becoming the first chief executive of the Bangalore-based outsourcing giant to have not come from one of its co-founders.

Concurring with the view, P Phani Sekhar, fund manager-PMS, Angel Broking says earnings most probably won’t be a game changer for the company. He says what Sikka has been trying to outline has already been expertly second guessed by the market and is in the price. He advises investors to in fact use the correction to enter the stock.

Below is the verbatim transcript of Phani Sekhar and Ajay Bagga’s interview with CNBC-TV18’s Menaka Doshi, Anuj Singhal and Senthil Chengalvarayan.

Menaka: We have seen a big cut in Infosys today down 5 percent. A Citi downgrade coming in, Infosys now neutral on their list. How would you position yourself on Infosys ahead of the earnings?

Bagga: Ahead of the earnings you can avoid the stock right now. It is going to be very critical what the guidance comes out. What the company has been saying in various investor meets is that the new CEO Dr Sikka will lay out the guidance for the next 18-24 months. What they have been at pains to clarify that please don’t expect a buyback, we will look at utilisation of the cash and come back with a policy for that in the next few quarters. So, we are not really expecting any buyback announcement to really come in and that might be having some impact on the stock price because there is worry that how do they use this cash and is it a drag on the return on equity.

Overall I would still remain optimistic on the counter with the new management, the early moves they have made and we need to give them some time. It has to be seen as a growth stock, it is a growth story. On a 1-2 year basis I would still recommend Infosys with the caveat that within the IT space we are lucky in India to have some good options. In the shorter term you might get better returns by holding the likes of TCS, HCL Tech and Tech Mahindra. However Infosys could be a dark horse coming out of the stable on a 12-18 month basis.

Menaka: Ajay seems to be indicating that it is not yet time to sell Infosys. In fact he is talking about it being a long term buy but markets don’t seem to agree with him at this point in time?

Sekhar: I agree a lot with what Ajay has said. However I don’t see the earnings day after tomorrow to be a major game changer for me to desist from buying it. In fact I would like this correction and I would like to use this correction as an opportunity to enter the stock. There is not going to be much of a surprise in the numbers and a lot of what Dr Sikka is probably trying to outline is already being very ably being second guessed by the market. So, I don’t see much of a surprise apart from the so called laying out of the strategy which again as I said is more or less in the price.

Let me come to a larger point which is that there are concerns about the run up in the stock leading to higher valuations compared with the growth prospects. If you see the mother market which is the US, is expected to grow at 3.1 percent as per the latest IMF forecast for 2015 and it is going to be one of the bright spots in the global economy. Since Infosys derives a large part of its business from US and discretionary IT spend which was suspended from 2008 is likely to revive. It has already started reviving in small drips and drabs in the form of SMAC but that is where I think Infosys and all other IT companies will really see exciting times going ahead. It is expected to grow at a CAGR of 18-20 percent for 2014-15 and 2015-16 and for that after today\’s correction it is trading at around 14.2 times FY16 earnings. Now contrast that with Sensex which is trading at 15 times which is at a premium but which is expected to deliver a lower growth. So, if you compare Sensex and Infosys, I think Infosys at this point in time is an excellent opportunity to get into for a long term investor.

Menaka: Where does Infosys rank on your list of IT stocks that one must buy or stay invested in on the basis of the background that you have just given us? Is it your most preferred stock right now?

Sekhar: It is because while it may not really outperform TCS in terms of revenue market share that it lost but the shear amount of productivity gains that can give you the real spring in the form of earnings expansion is much higher in Infosys as compared to TCS. So, the valuations are really showing you while Infosys is trading at 14 time FY16 earnings TCS is trading at 18-19 times. Infosys has a much better chance of bettering its consensus earnings forecast as compared to TCS. So, on a 12-18 months basis I guess Infosys can give you a better risk adjusted return compared to TCS.

Anuj: What is your call on that because the gap between TCS and Infosys if at all has in fact even widened further. We have been talking about this discount narrowing and barring a 2 or 3 month period this discount has actually always widened. So, in your sense do you think this discount is going to persists, widen further or is there scope for narrowing of this discount?

Bagga: TCS has put in a lot of distance between itself and the rest. Clearly you see a lot of talk that there is just no alternative but to own TCS if you are in Indian IT. So, I would say every portfolio you can have TCS. It is a growth stock and it is just too huge to ignore for an Indian investor. Clearly that would be my first pick in the IT sector irrespective of where the valuations are currently because it is going to surprise on the upside in terms of the earnings growth.

Infosys, I think is a longer term bet. What I would recommend – unsolicited advice is if they can raise their payout ratio, they have put in a 40 percent dividend payout ratio that is giving them a dividend yield of around 1.7-1.9 percent. If you can increase that payout ratio because you are not utilising that cash and you are putting it in liquid mutual funds or fixed deposits really not giving any returns to the shareholders and if you are not looking at a buyback or acquisitions you are talking of a USD 100 million fund which for a company of the size of Infosys is really not there at all. I would say give out more dividend and that will rerate the stock immediately. I hope something comes out tomorrow on that in terms of if they lay down a path for that on a higher payout that itself could have an impact on the valuations.

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