New Delhi: Trideep Bhattacharya, IT Analyst at UBS Securities feels that majority of rupee appreciation is already done for CY07 and feels that risk of the missing guidance is lower for TCS and Satyam. Satyam may meet rupee guidance and revise dollar guidance up whereas TCS margin may fall by 250-300 basis points on wage hike impact.
Excerpts from CNBC-TV18's exclusive interview with Trideep Bhattacharya:
Q: What are you factoring by way of the rupee movement and where might it trade at for the next two quarters?
A: Based on our economist view, we have assumed 9% currency appreciation in FY08 and 3% further appreciation in FY09.
If you look at the EPS estimate for FY09, the valuations are at 19.5 times one-year forward earnings. The rupee is reasonably poised as far as valuations are concerned vis-à-vis the growth rate that is expected from the company. So, we believe that valuations are reasonable.
The worst quarter, which could have been in the form of currency appreciation, wage inflation and visa costs have been taken into the financials.
Come the September quarter, we should see a better revenue growth profile along with an improvement in margins. That would hopefully turn the sentiment of the sector towards positive.
Q: What do you expect now from Wipro, TCS and Satyam?
A: They will also come and report a decline in margins as much as what we have seen in the case of Infosys. The risk in case of TCS and Satyam is bit lower than that of Infosys because Infosys guided last time around at 43.1, whereas Satyam guided at around 42.3 and TCS does not have an outstanding guidance so to speak.
The question of missing the guidance, which seems to be another critical parameter which most investors look at, that risk is lesser in the case of TCS and Satyam. However, the currency appreciation is a fact of life and to that extent they will see margin erosion.
Satyam might actually meet their rupee-term guidance and we expect to see a dollar guidance revision upwards. It also goes true in terms of performance with TCS as well.
We do expect 7-8% dollar term growth performance from TCS and Satyam as well in terms of revenues. Margins might come off in the range of 250-300 bps for TCS because they also have the salary impact. In the case of Satyam, it will be lower because their salary impact comes in the September quarter.
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Q: Do you see the possibility of a big currency risk derailing any of your projections for this year and next year? Do you feel confident about projecting any of the numbers, looking at how the currency is doing as the numbers would have changed significantly from the start of this year to the end of this quarter?
A: I am no expert on currency. We take the view of our resident expert on currency or our currency strategist when we make our forecast.
The demand scenario continues to be quite robust. They have the slack in the system in the form of capacity utilization, pricing, etc., which hopefully will give them enough buffer to mitigate the impact of currency to a certain extent.
Our currency strategist is saying that for the fiscal year CY07, majority of the currency appreciation we were to see is behind us. So, from here it should be a reasonable and nominal currency appreciation. I would take his view as gospel of truth and proceed based on my forecast.
Q: Is it a fair question to ask for investors on whether this sector and the stocks deserve a lower PE multiple in the light of the growth they are going to report in rupee terms. If one is talking about only 20% kind of growth, do current PE multiples flatter or are they too expensive?
A: Even if you include the currency appreciation and the tax impact, which will come in 2010 and with a reasonable degree of conservatism, the earnings CAGR that they will report will still be around 21-22%.
Looking at the current PE multiples vis-à-vis the earnings CAGR we are likely to see in the next three years, which is 19.5 times in the case of Infosys, it will be lower for other companies. It is fair to say that the valuations multiples do not do justice.
The fundamental growth environment, which includes the total market size where the companies operate in and the positioning of the Indian IT services players in the global IT services landscape, continues to be favourable. So, in the long-term, once the currency stabilizes at a particular level, then we will start seeing nominal appreciation of about 2-3% per annum and the growth rates will swing back to reflect the dollar term growth.
If that be the case, I do not think we should be making a structural case that the growth rates have disappeared because the business is growing quite fast. It is just that in rupee terms the growth might be lower but in dollar terms the growth will be quite high. So, the profile of the investors might change but from a growth standpoint, this continues to be a growth sector and these continue to be growth companies.
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