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Indian IT stocks to outperform Asian tech sector: JP Morgan
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July 13, 2006

Bhavin Shah of JP Morgan expects TCS [Get Quote] to report strong results as well; he forecasts Q1 revenue growth for TCS at 10 per cent.

He further states that during the massive fall, which the Indian market and IT shares were experiencing, JP Morgan has became more bullish on the Indian IT stocks.

Shah feels that Indian IT stocks will not only outperform the Indian market but also outperform the technology sector in Asia.  

He also adds that the results and guidance of Infosys [Get Quote] Technologies was impressive. According to him, Infosys has planned for a stronger growth this year.

Excerpts from CNBC - TV18's exclusive interview with Bhavin Shah:

What do you expect TCS, Wipro [Get Quote] and Satyam [Get Quote] to do in the light of what you heard from Infosys yesterday?

We think TCS should report pretty strong results as well, close to 10 per cent revenue growth is what we are expecting.

Based on the acceleration that Infosys is seeing, there is room for the company to also surprise on the upside. However, Infosys probably has benefited from some company-specific factors as well. We note that topline grew 40 per cent QoQ. 

Just a year ago, they were facing some large client-specific issues of slowing their growth a little bit. Now they are benefiting the other way. So I wouldn't expect the same kind of massive surprise from other companies. But clearly, a lot of macro factors are in favour of the companies, so I would also expect marginal upside surprises from other companies as well.

Do you expect technology to be a market outperformer in the next 6 - 9 months in the light of what we have seen from Infosys, or would you wait for some of the other results before commenting on that?

During the massive fall, which the Indian market and IT shares were experiencing, we have actually became more bullish on the Indian IT stocks. We added Infosys to the long side of the core portfolio. So we do feel that Indian IT stocks will not only outperform the Indian market but they are also expected to outperform the technology sector in Asia.  

Do results and guidance of Infosys Technologies look as impressive this morning as it did yesterday?

Yes, they were indeed very impressive. I think the key factor is that the company has planned for a stronger growth this year and it is materializing. In fact they might have seen real acceleration in business towards the end of the quarter. So the results might have surprised, not only the analysts and markets by low margins but also the company.

Would you put the slippage in margins down to visa costs and do you expect that to be just a quarterly phenomenon for them ?

Visa cost is obviously one of the key factors that pulled down margins. There are several factors that will come to their benefit in the coming quarters. One of them is visa costs tapering. But there are also other factors as jump in sales and marketing costs in the first quarter that will stabilize going forward.

We think that there is room for increase in utilization; they are far below their maximum capacity utilization. Given the demand in environment, they should also benefit from increase in utilization. So it is quite conceivable that they will come back with higher margins and achieve what they are saying, which is flat YoY on margins.

You were talking about a possible Rs 130 EPS on the stock now? According to you, what is the price target for the stock?

We revised our EPS upto Rs 132 for FY07 and Rs 168 for FY08. Our price target is Rs 4150 for March 07.  The earning growth is accelerating and the company can still give 35 per cent kind of sustainable growth, atleast for the coming year and maybe even slightly beyond hence there is some room for PE multiple expansions as well.  

What are you picking up from the ground in terms of midcap technology space?  Do you think they might emulate what Infosys did, or they may fall short to those kind of growth numbers?

If one looks at the last several years, the study we have done clearly shows that the growth of the large Indian IT companies  is outpacing that of the mid-sized companies. We don't see any fundamental change to that development.

The environment benefits the small companies as well. They select high growth areas like software testing that Aztec Software and Technology Services  is into. But overall, we still feel that large cap companies have bigger opportunities and will continue to outpace the growth of mid-sized companies.

What is your call on HCL Technologies [Get Quote]?

We are positive on HCL Tech.  If one looks at the DCF valuations, we can see quite a bit of upside in this company as well.

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