The IT space has a positive outlook in view of the second-quarter results and strong deals bagged by most companies in the last one year, believes Vinod Nair, Head of Research at Geojit Financial Services.
As far as TCS is concerned, its topline and bottomline were marginally below the estimate, he pointed out during a conversation with Sunil Shankar Matkar of Moneycontrol. Any further correction will be used as a buying opportunity, given the uptick in the long-term forecast and strong orderbook. TCS shares corrected more than 5 percent in Monday’s trade.
With around 20 years of experience in equity research, Nair feels the overall second quarter results will be better than that of the first quarter’s, thanks to easing of Covid restrictions and a rise in demand. Excerpts from the interview.
Did TCS quarterly earnings live up to your expectations? Is it overpriced now with 36 percent gains year-to-date and should one buy the stock now? What is your broad expectations on rest of IT stocks earnings? What could be opening premium/discount for TCS on Monday after earnings?
Revenue and PAT are marginally below the street expectations. We can expect muted trading in the short-term. Valuations is on the upper side but not overpriced, given the robust long-term outlook. Any further correction will be used as a buying opportunity given the uptick in long-term forecast and strong order backlog. Broadly, we have a positive outlook on the IT sector based on its Q2 results as strong deals were won during 2020-21. We expect positive commentary and guidance in the IT sector.
What is your analysis over the monetary policy? Have you changed your projections (inflation, growth, rate hikes and so on) after the policy?
The policy is mostly in line with our thoughts but drop in CPI forecast to 5.3 percent from 5.7 percent is marginally against our view. We feel that upside risk of global inflation to spread from short-term to medium-term is rising due to extended super-cycle of commodity prices and supply constraints. These factors can have a higher impact on the economy as the country is a net importer of commodities along with rise in imports and local demand.
Do you think inflation and oil prices can dampen the market sentiment and become a cause for major correction in the near future?
Yes, the risk of inflation to slow down the rally of equity market is rising. High inflation is also supported by high amount of liquidity in the system. I think it will force world central banks to reduce the amount of monetary support and curb the level of excess money in the system. On Friday, the RBI governor stated that given liquidity overhang, need for GSAP (open market purchase of government securities to increase liquidity) is currently not required. The suspension of G-SAP could bring some spike on bond yields in the short-term. A similar monetary action is expected in the US and Europe in the upcoming policies, which will affect the equity market.
Auto and realty stocks had a strong run last week. What are major reasons and should one buy these stocks now or be selective? What can be bought among them?
It is in anticipation of festival season and rise in monthly home registrations. Expectations are high that both the sectors will continue to do well due to further reopening of the economy, low interest rates and festival season. The upside in the sector can continue in the near-term, though valuations are on the upper side. The realty sector has good Q2 results expectation while auto is muted. The best to consider in real estate are companies with low debt and high brand value. In auto sector, focus on companies with long-term vision over EV. Two wheelers can be avoided in the short to medium-term due to high competition.
Fitch Ratings has cut its economic growth forecast for FY22 to 8.7 percent from 10 percent due to severe second Covid wave. Do you agree with Fitch Ratings and what is your forecast?
The RBI has a higher forecast of 9.5 percent which is in line with our view. The high frequency indicators are showing strong rebound in the domestic economy. The upcoming festive season provides a strong impetus to growth. The fiscal and monetary support would also aid in economic recovery. If India escapes from the third wave of the pandemic, the country will be able to achieve higher GDP growth rate in FY22.
Can you name the sectors which could report double-digit earnings growth and fall in earnings growth in Q2FY22 versus Q2FY21?
Overall, the Q2 results are forecast to be better than Q1 due to lack of global and domestic lockdowns and rise in demand. Sectors with strong YoY forecast are metals, real estate, logistics, chemicals, telecom, construction -based segments, and banks and financial services. And sectors with weak forecast are auto, cement, consumer durables and pharma.
Importantly, I would like to mention that more than quarterly results forecast sector performance is based on future outlook. Sectors with strong upgrades are auto, realty, consumption, banking, hospitality and entertainment due to reopening of the economy, low interest rates and festival season demand. Other sectors with positive outlook are those in the implementation of production-linked incentive (PLI), focusing on clean energy and upsurge of new-generation companies of high growth views.
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