In an interview with NDTV Nilesh Shah, MD & CEO of Envision Capital, said that while the technology sector might get into some kind of underperformance because of the outlook on the rupee vis-à-vis the dollar, but otherwise it is set to outperform.
NDTV: The Infosys numbers were good, but were they good enough? EPS guidance might be upto 100 on the upper side, however street consensus had already factored 102.
Nilesh Shah: I think the numbers were broadly in line with the revised estimates of analysts, but I think having said that, you always have to keep in mind that the stock is already trading at 20 plus times, current year expected earnings. But technology and Infosys have always been about what do you expect going forward. So based on the set of numbers and the guidance that the management has given and basically the optimism which the management has displayed in terms of the future prospects, I think it’s quite possible that technology as a sector will continue to outperform and within that Infosys could potentially continue to get re-rated. I think what we have to see in the next 1-2 quarters is that are we going to get into a phase of earnings revision which analysts will do. I think that possibility is going to be very high as the US economy recovers. All in all, while it might get into some kind of underperformance because of the outlook on the rupee vis-à-vis the dollar, but otherwise I think technology is set to outperform.
NDTV: Do you have a similar view for the mid-cap IT stocks or this outperformance view is only for the larger stocks?
Nilesh Shah: I think the sector as a whole should kind of benefit, particularly if the global environment and the US economy turn out to be more benign than what it has been over the last 12 months. I think the entire sector, as a whole should benefit. Coming to mid cap IT companies, I think valuations are relatively cheap. But I think investors will have to be very, very selective. They’ll have to focus on two things, one is the pedigree of the managements and two, is the ability of the managements to manage risk. I think that’s very, very important. Also I think most important is risk management on the side of the currency, because the currency has been a lot more volatile over the last 1-2 years and I think that situation will continue even going forward. I think that’s going to be the important test for most of the Tier 2 IT companies. So that’s going to be very critical and it’s better to stick with companies that have strong pedigrees, good risk management and where earnings visibility is reasonably good.
NDTV: A quick word on telecom
Nilesh Shah: I think it’s going to be a while before this sector gets back its lost charm and I say this for the first time you’re clearly seeing the pricing environment for the entire sector changing and not remaining as benign as what it has been for the last several years.
While they will continue to have volume growth, but they are clearly going to have pricing pressures. Therefore, it’s quite possible that while there might be absolute returns to be made, but one will have to see that the sector is well placed to kind of deliver relative outperformance, which it has been doing now for several years together.