Emerging integrated vendors & size-growth rate balance big challenges for IT: Suresh Mahadevan

Suresh Mahadevan, Head Of Research, UBS Securities discusses the just out IIP numbers and lists out the sectors the brokerage is underweight on, in a chat with ET Now.


Let's talk about the next earnings figure and I hope you can take us what you expect here this time around from Infosys and the IT sector on the whole and whether you think a large part of that has already been worked into the prices?

Suresh Mahadevan: IT sector is one of the sectors we are underweight on a model portfolio and we have been underweight from late last year since November and initially the stocks kind of moved against us but now I think more or less coming around to our view. But broad brush we think the sector sounds the growth rate analysts are forecasting may be higher than what the reality could be because we do believe that structurally there are reasons not to be very positive like integrated vendors emerging as a big challenge and also these companies are not small anymore.

Some of these companies are fairly large and we do think at the higher base some of the growth rates which the street may be forecasting may not come through but immediately obviously there are tailwinds with respect to the global recovery particularly with the banking financial services sector that might be baked into the near term numbers but as a structural call we have kept IT as an underweight here.

What else are you underweight on right now?

Suresh Mahadevan: Yes, I talked about consumers which we were underweight on. IT is another and metals is a area where we are underweight on particularly because of the global weakness and oil and gas we are underweight on and telecom we are underweight on. So those are our big underweight sectors at this point.

Also, with respect to the kind of IIP figures that we can expect later on do you think it will slowdown towards a single digit number by the end of the year?

Suresh Mahadevan: Actually, I do not think that is in our numbers but as I said earlier I have not been able to speak to our economist but its very unlikely that one data point like this could change our forecast it looks pretty unlikely, but we do expect obviously some amount of tightening in terms of interest rates. We do expect clearly the IIP numbers kind of rolling over, which I think we have seen the first data point. So in my sense generally outlook is still fine here from our perspective.

What is your call on segments such as autos?

Suresh Mahadevan: Autos we are neutral at this point but within that I am quite positive on Maruti because high quality company available at reasonable valuations. I understand the arguments around headwinds on raw material price increase and headline competition etc. but the reality is India is No.1 auto maker with the probably 50% market share and you can buy this company for $8.5 billion even today, which looks pretty attractive to me.

This is because structurally I do think given our low level of household average and what are view on economic outlook is we should be selling at least 3x the number of cars then we are selling in 5-6 years time so my view this is a company which will benefit. So within autos I think we prefer Maruti.