One should bet on tier-1 companies from a valuation standpoint and that is where I see the maximum amount of comfort because valuation runup has been fairly steep for both the tier-1 and tier-2 companies, but much more in case of the latter, says Girish Pai, Head – Institutional Equities, Nirmal Bang.
From TCS to Infosys to
to MindTree, most of the numbers are out. What is your pecking order?
The results have been a bit of a mixed bag though I would say the overall commentary is talking about a revenue growth pickup going into the medium term. Quarter specifically, I would say it was a bit disappointing from an HCL Tech and TCS perspective but the results of Infosys, Wipro, MindTree were all pretty strong, both on the revenue side and for Infosys, even margin expansion played out better than expected.
One should bet on tier-1 companies from a valuation standpoint and that is where I see the maximum amount of comfort because valuation runup has been fairly steep for both the tier-1 and tier-2 companies, but much more in case of the latter.
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I believe there is a growth acceleration for the IT sector but it is about 300-400 bps from a structural perspective and I am talking from a three, four years’ standpoint versus the growth we saw between FY15 and FY20. So to an extent, the multiple expansion is justified but whether it is justified to the levels where they currently stand right now I am not very sure. We probably have to go back to 2007 for the industry to have seen these kinds of multiples and in that time, the companies were growing much faster.
The key thing here is what is the multiple you would want to give. I am a little uncomfortable with the multiples at which some of the tier-1 companies are trading and I have a neutral stance on them. I would probably want to put some incremental money to work in HCL Tech and
where I find valuations to be a little bit more comfortable.
The market is probably being a little bit pessimistic about the growth prospects of HCL Tech going forward. Yes, the quarter itself was a bit of a dampener, the products and platforms business did not deliver but that should happen in Q3 and the order inflow numbers are very strong. So, I would be a little positive on HCL Tech going forward.
We see a rotation more towards the largecaps and within the largecaps, there is also pergence at play.
Yes. I think there is going to be a rotation. I would hope that there would be a rotation back towards tier-1 companies because the tier-2 run up has been fairly substantial. Just to give you some data points, at the beginning of 2020, the tier-2 stocks on a forward PE multiple basis were trading at about 15% discount to the tier-1 stocks.
Today the tier-2 stocks are trading at about 40-45% premium to the tier-1 stocks and that too after a fairly strong earnings pickup. So there is obviously a very strong revenue and earnings growth in FY22 and FY23 for a lot of the tier-2 stocks and a lot of it is already there. It has been imputed by me and my peers in the market and it is reflected in the multiples. So the risk reward is probably better in tier-1 compared to tier-2 companies.