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Betting on IT and pharma midcap stocks: Abhimanyu Sofat, IIFL

| July 15 2019 15 : 08 IST | Economic Times

In telecom, Bharti Airtel could be an interesting stock and we continue to be bullish on it, says Abhimanyu Sofat, Head of Research at IIFL Securities. Excerpts from interview with ETNOW

 

Infosys has surprised everyone with their guidance and with their commentary. What could be the immediate upside for Infosys in the next three to six months?
If you look at the results, clearly $2.3-billion the deal wins look quite exciting. The concern is if you look at the recent industry surveys, the overall annual contract value growth for the industry this year is expected to be around 5%. With regards to Infosys, there is an additional challenge that now the attrition rate is expected to be close to around 23% which seems quite high. So, margins may not improve going forward. 

With regard to the price, clearly considering how the results have panned out from here, at least a 10% up move on the stock over the next two-three months appears likely. In terms of multiples, it is trading at around 17x relative to TCS, which is trading at around 21x. As a house, we believe that Infosys has a better risk reward. However, it is the midcap side companies like MphasisNSE -1.19 % where the upside is likely to be better since multiples are at a significant discount to these companies and the earnings growth is expected to be pretty good. 

In case of Infosys, the earnings growth is likely to be just 8% CAGR and that is why we are more bullish on the midcap IT side than the largecap IT names. 

What is your view on IndusInd? They reported a strong set of numbers.
The heartening thing in the IndusInd Bank numbers was that the provisioning was not increased that much. However, if we look at the entire integration post the Bharat Financial merger, clearly there are challenges in the automobile sector. On the other side, the rate of growth is expected to come down. Overall, the numbers were pretty good with the stress not expected to be there. So there was writeoff on the IL&FS numbers. 

We feel that considering where the price is and the kind of derating the stock has had, a 12% upside from the current levels is clearly visible in the case of IndusInd Bank but one needs to be cognisant that going forward since a significant amount of business comes from the commercial vehicle segment and we are seeing some amount of slowdown and car volumes as well. The growth rates going forward may be a bit lower for IndusInd Bank. 

What happens to a stock like Wipro where a buyback has been announced? The contours are out in the open but after the tax on buyback, it may not be all that effective?
We need to look at some clarification. There were some media reports that the government is contemplating a grandfathering similar to what happened in the case of long term capital gains tax. Let us see what happens. 

In terms of business performance, we clearly see that Infosys and TCS are better performers relative to Wipro. That way, we were not recommending Wipro to clients. With regard to buyback, let us wait for some government clarifications. A lot is at stake. Clearly the case of KPR Mills have been seen. Due to the regulatory reasons, one cannot pay their taxes and for that reason, there is a lot of uncertainty where hopefully the government will come with a clarification soon. 

What are your views on Sun Pharma
We would like to see more numbers coming up because the kind of concerns one has had with Sun Pharma have still not gone away. With regard to speciality business which they are planning to ramp up, margins will be a big challenge over the next two years.

Despite the stock correcting, we are not that bullish on the stock as of now. We would prefer some of the midcap stocks. Recently we have been recommending a stock called AlembicNSE -0.46 % Pharma where we are seeing 17% growth and free cash flow improvement of Rs 50 crore going up to Rs 200 crore next year and in two years, going to around Rs 400 crore. It is more of a bottoms up kind of an approach within the pharmaceutical sector and as of now, Sun continues to be negative. 
 

What is the outlook on the telecom space?
For the next couple of quarters, one should see improvement in players like Bharti Airtel. In the recent numbers which were announced, we clearly see that the kind of pace at which Jio was outperforming the industry, seems to have tapered off. Also Jio does not have enough spectrum in the metro area and that will lead to lesser growth for Jio. 

The IPO coming up for the African company of Bharti Airtel will be an additional trigger to deleverage the balance sheet for the company. However, now let us see what happens on the 5G auctions which are due to happen in some time because clearly the industry does not have the kind of money which is required or which is expected by the government to garner. 

People are going to have more of a wait and watch kind of an approach to those. Bharti Airtel could be an interesting stock and we continue to be bullish on the same. 
 

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