HCL Tech warrants re-rating, good stock to own: Manish Sonthalia, Motilal Oswal Asset Management

It seesm that pecking order in IT stocks is likely to change with HCL Tech likely to outperform Infosys soon. Manish Sonthalia, Vice-President and Fund Manager, Motilal Oswal Asset Management, in an interview with ET Now, speaks about the same. Excerpts:-


ET Now: The way how HCL Technology numbers have come out, is there a scope for the pecking order in large cap IT to change?

Manish Sonthalia: Yes, looking at HCT Tech’s number I think Infosys was a stock specific case and may be more confirmation on this could be had from TCS numbers which reports after market today. But, clearly the numbers are better than estimates, whatever HCL Tech has reported both on top line and bottom line and there could be a change in the pecking order. If TCS reports similar strong numbers than it could be TCS, Infosys and then the second tier IT companies.

ET Now: HCL Technologies is always traded at a 25% to 30% discount to Infosys, about 35% discount to TCS why is HCL Technologies or historically why has the stock always traded at a discount to TCS and Infosys?

Manish Sonthalia: It has got to do with the size of the company and the revenue mix, IMS within infrastructure management services generally carry a lower margins whereas high value added services which Infosys and TCS too, they carry a bigger margins. It is about the size and the mix of the revenues which determines what PE multiples you are going to get. Gross margins of Infosys are 45%, TCS is lower than that and HCL Tech is even lower than that so it has got to do with that.

ET Now: Out of the entire lot there has been of course a lot of institutional that has been there in HCL Tech even as a stock benchmarking to Infosys and Wipro. EBITDA margins for the company have been able to coming at a higher level, 18.4% versus about 17% so there has been traction there. They have been good at controlling cost and of course have managed the currency movements. Is there a target that you would hold on HCL Tech with a near term perspective six months to eight months?

Manish Sonthalia: The valuations are quite reasonable. If you look at one year forward earnings then may be they are trading at closer to around 11.5-12 times, which to my mind company and the quality of HCL Tech does warrant a rerating and traditionally we have seen that it trades at closer to 14-15 multiples. It is a good buy and not a bad stock to own at current prices.

ET Now: A depreciating rupee for the quarter gone by suddenly made IT stocks look attractive. Now that rupee has appreciated against the dollar is it time to revisit IT stocks? Will IT stocks continue to outperform?

Manish Sonthalia: Yes, you are right. Outperformance will not be there in the fourth quarter if rupee was to appreciate and whole likelihood that rupee would continue to trade between let say 51 and 52 so it would be all boiling down to operational parameters and traditionally the third and the fourth quarters are not very strong quarters. A lot of the outperformance may have already been seen may be at this given point in time and going forward may just be a market performa so you are right in that regard.