Kawaljeet Saluja, head, Kotak Institutional Equities
Indian IT has made a good beginning by providing qualitative commentary on order booking and in certain cases quantitative data as well. Even as growth for large companies with the exception of TCS has been muted, managements have been optimistic about deal wins and total contract value going forward. It is hard to extrapolate the bookings as an indicator of material acceleration in growth. We think that the answer is not straightforward and depends on the extent of leakages in traditional business, defense of share against consolidation decisions and new wins. Order bookings portray only a part of the picture and their predictive power of magnitude of growth acceleration is low. For instance, HCL Tech had consistently called out quarters where net new order wins were over US$1 billion from December 2012 to June 2014. However, continued deceleration in revenue growth in FY13 and FY14 against the backdrop of strong order bookings surprised many. Similarly, Infosys’ growth rates slowed down at the time when it had the highest deal wins.
Vinay Paharia, CIO, Union Mutual Fund
While there is positive commentary, we don’t look at just the short-term issues like deal wins and order book. We look at overall fair value which is driven by four factors – return on capital employed, long-term earnings growth, risk-free rate and riskiness of underlying cash flows. In addition, two things are working for the IT sector — one is that it’s a knowledge intensive sector and not a commodity which can be easily imported. There are large companies using Indian talent and are getting significant value out of it and hence it’s not easy to outsource from other locations. Hence, companies in this sector have market leading returns on capital employed. We believe that large cap IT companies have significant upside on a relative basis as compared to companies in other sectors. We are overweight on IT sector because of favourable valuation and potential growth. Estimates still haven’t taken into account the impact of rupee depreciation and going forward, it should flow into expected earnings growth and result in upgrade in near-term earnings.