The Economic Times daily newspaper is available online now.

    Sweet spot coming up for IT as firms get back their mojo: Dipen Sheth, HDFC Securities

    Synopsis

    Indian IT industry is run by some of the smartest people, says Dipen Sheth of HDFC Securities.

    DipenET Now
    Both BOB and SBI are run by excellent managements and this is the time when we need to take a really hard look at whether PSU banks are really doing justice to their shareholders.
    Talking to ET Now, Dipen Sheth, Head – Institutional Research, HDFC Securities, says what is important in Nasscom’s guidance is the noises that they make on the disruptive part and how Indian IT is positioned to tackle that disruption.

    Edited excerpts:

    What has been the charter at the Infrastructure Forum? What have been the key takeaways from day one?
    Let me walk you through what the event essentially was; we invited 15 companies to attend the Infrastructure Forum and so they ranged from Rs 1600-1700 crore market cap all the way up to about Rs 13,000 crore. Plus, we had four unlisted companies, people like KCC or Monte Carlo Ltd and GR Infra. These are unlisted companies in the space and they brought their own unique flavour in terms of the insights that they brought from the ground for investors in the listed space to learn from.

    Our rough estimate suggests that these 15 companies between them had close to about two-thirds of the infra order book of the country. Their revenues ranged from under Rs 1000 crore to over Rs 7000 crore. We had road builders, HAM bidders, metro railway contractors, irrigation system and canal makers, mining contractors, urban infra specialists, building construction companies etc. The entire spectrum of infrastructure makers was here. And I think they gave a unique opportunity for institutional investors to figure out what is happening in the infrastructure space.

    Unlock Leadership Excellence with a Range of CXO Courses

    Offering CollegeCourseWebsite
    Indian School of BusinessISB Chief Digital OfficerVisit
    IIM LucknowIIML Chief Executive Officer ProgrammeVisit
    IIM KozhikodeIIMK Chief Product Officer ProgrammeVisit

    Within infrastructure, considering it encompasses such a wide field, where is it that you are finding maximum value and maximum wealth creation for investors? What are the pockets they could still look at?
    Roads is where all the action is but I do not think we should get carried away by that. Roads and now increasingly urban infra as the metro tenders mature in various cities are important.

    India is actually on the edge of what I would describe as a super cycle of building infrastructure. It is not that we never needed infrastructure or that we were not conscious about it or that infra was not a big talking point at almost every national forum or event, it is just that this is now completely policy driven and it is aimed at boosting productivity across a range of sectors. The government has removed a whole lot of hurdles and burdens on infrastructure developers which used to bog down their performance and ultimately result in stressed balance sheets and also result in not delivering the infrastructure.

    A whole lot of these players who attended might have begun as subcontractors for larger road builders or infra asset owners in the past. Many of these guys have now diversified their business mix across a wide variety of spaces and maybe we should not look for a particular flavour. All that we need to look for is whether their order books are growing, whether they are good at execution, whether they can hold on to their margin guidance and whether their cash flows justify the kind of valuations that some of them are trading for.

    I am going to talk about the Nasscom guidance. Do you think that the Nasscom guidance is going to strike the right chords?
    So you will remember me as the guy who has been holding a flag for IT ever since it ran into a whole lot of worries. The big picture on IT is still murky. I will say that if you look at a two, five or a longer year period, then the services part of the IT business is certainly going through a disruption.

    However, you need to temper this with the fact that the IT industry in India is run by some of its smartest people and we have consistently and successfully competed against the best minds globally in this sector to repose faith in this sector. When it goes through a difficulty, that is actually something that should naturally come to value investors and that is what has played out now for the last year or so.

    After December, if you will remember, coincidentally that was the time when we held our mid-cap IT forum but that is a small coincidence I would say. Post December, the kind of run up that you are seeing in IT stocks tell you that a little bit of sector churn is happening.

    The sceptic in me says that we really do not need to worry about Nasscom’s guidance, we really need to track US GDP growth, we really need to track US corporate spending and their appetite to spend on technology to be constructive on IT and much of that has played out. What is important in Nasscom’s guidance is the noises that they make on the disruptive part and how Indian IT is positioned to tackle that disruption.

    I still believe that a lot of India’s IT service firms are not fully geared but some of them have started making the first few moves whether it is in terms of automation, whether it is in terms of digitisation of their businesses, whether it is in terms of moving up utilisation from the early 70s to the mid-80s now and whether it is in terms of taking up fixed price contracts and embedding more and more nonlinearity in their services.

    In fact, some of them have actually moved towards product development and these are some of the smaller firms. So, I think Indian IT is run by smart people, they have got a little bit of a whammy over the last couple of years and they are responding, if not magnificently at least admirably well in the circumstances. I think as the dollar strengthens and as some of these IT firms get back their mojo we are actually looking at a sweet spot coming up for IT. So, I am not just going to get completely swayed by whatever Nasscom says, I will look for signals of future evolution rather than a percentage guidance today.

    Will you be a contra buyer in PSU banks?
    Everything that is inherently good in the markets goes through a bad phase. However, not everybody who goes through a bad phase is inherently good and I know I am sounding a little confused here but let me say this in explicit terms and let us bring back the IT analogy here. The market knew it that IT firms are run by talented people, they have very clean cashflows, they have very high corporate governance standards barring the occasional blowup like Satyam and they are inherently competitively capable of facing up to competition from outside countries or from other firms.

    I am not sure whether you can say the same about PSU banks. They are legacy businesses. They do not seem to be customer friendly. They are now going through a crisis as it were of perceived fall and cracks in corporate governing standards and they run in a very, very tightly regulated industry with not so great corporate governance problems cropping up from time to time, as we have seen in the NPA blowouts.

    Their master, which is the Government of India, essentially does not seem to be too aligned towards shareholder value creation unlike some of the private players or the NBFC players. Now, does that mean that PSU banks are a complete washout? Absolutely, not. Instances like SBI and BOB come to mind immediately if you tell me the entire PSU pack is junk I would say that is a complete exaggeration and we should not be looking at it that way.

    Both BOB and SBI are run by excellent managements but they have gone through their hassles in life, their failures in life and this is the time when we need to take a really hard look at whether PSU banks are really doing justice to their shareholders. The best moves on this front will not come from their managements as much as they will come from the government and I will wait for something really big to happen there before thumping the table on PSU banks.

    What is your view on pharma as a space because February is turning out to be a rather critical month; a lot of the US FDA pending inspections are currently on but you are not really seeing a bout of clearance coming in from the regulator as such. It is a very selective story when it comes to pharma. You cannot really paint it with the same brush much like IT is turning out to be. What would you do with some of the pharma names?
    That is an interesting question to raise. The similarity with IT is that pharma is also run by highly educated sharp and clever people. Some of the smartest minds in our country run phrama businesses. Pharma is also a sector where we have had reasonably good corporate governance. It is not that these are companies with very high return ratios or very clean cash flows. These companies have typically been run by managements which have exhibited great corporate governance in the past and this is also an industry where a lot of the mumbo jumbo is not understood by let alone, average retail investor, even by seasoned institutional investors as well.

    This industry has gone through a crisis of sorts. It has essentially depended on two legs; one is the almost continuous erosion in generic products in the lucrative US market and two, the regulatory clamp-downs that have played out over the last two or three years.

    There has been enough reason for investors to worry about this sector. That said, we are seeing the first signs of a comeback here and the first signs of a long but solid bottom being formed. Talking about companies which have bounced back from regulatory clamp-downs, Divi's and Cadila come to mind immediately. The large companies like Sun Pharma and Dr Reddy’s are going through re-invention in their business models as they grapple with generic price erosion as well as the regulatory troubles that they have gone through.

    It is time not to wait for the good news to come in but to selectively place faith in many of these companies, based purely on the fact that they are run by clever people who can be depended upon to steer their companies out of a crisis. Definitely, names like Lupin, Cadila despite the slightly high valuations come to mind and a couple of interesting picks in the midcap space will also matter I guess. But maybe, that is something you might want to leave for a later discussion.

    Talking about hospitals and especially Fortis, what is the story besides the fact that it is a tangible asset -- hospital – which is there for everyone to see. Irrespective of what is going on with the management, these are takeover candidates. Fortis owns large capacity hospitals.
    Hospitals is a very capital intensive sector and the franchise gets built over years. Looking at the addressable opportunity for organised healthcare in India, valuations have typically been if not over the top, then at least extremely high. We do not have Fortis or any hospital stock under coverage for precisely this reason. However, what does seem to be playing out in Fortis right now is a serious corporate governance issue and I will refrain from commenting on the details until I understand it fully.

    But I do believe that the sector is a sunrise sector and if high corporate governance standards are adhered to, there is no reason why hospitals cannot generate wealth for equity shareholders. The corporate governance angle is why Fortis is going through a major rethink on the part of investors right now and we will have to watch this space to figure out what is happening.




    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more


    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
    The Economic Times

    Stories you might be interested in