Could you give us an idea of what has actually driven this kind of rally that we are seeing in the IT index, as EPS updates are not enough to support this kind of rally?
Abhishek Kumar: You’re right, Gaining upgrades They have not materialised yet, but if you look at the last few quarters, earnings downgrades have been happening consistently and they seem to have stopped, so this is kind of the first milestone in the inflection. So the worst seems to be behind us in the sector. The demand commentary we hear from most companies is that things are stabilising. There are green shoots, especially in the banking sector, and the overall consumer price index is a leading indicator of the broad recovery in the sector.
And with Reduction of rates In the US, some leveraged sectors like telecom, manufacturing etc. may also start opening up from FY26. So, with such forecasts, I think it is logical for investors to take positions and that is essentially driving the multiples higher in the hope that earnings improvements will kick in in due course.
But do you think investors are getting too far ahead of themselves here? If you look at valuations, they are still above or below the five-year and two-year averages that we have seen. So it is not cheap by any measure, and even if you look at valuations, earnings yieldThis year, growth is expected to be in the low single digits, and next year we don’t know if it will be in the double digits or not. So, should we be thinking about paying premiums of, say, 30 or 35 times to companies that report single-digit growth?
Abhishek Kumar: So that’s an ongoing debate. I agree with you, the sector and especially the big companies, even in good years, will probably deliver double-digit earnings growth. But I think what has happened explains a structural improvement in margin or rating band The problem is that with the increase in technological intensity, with new technologies like artificial intelligence, etc., the longevity of earnings has improved a lot and that gives a slightly higher valuation if we just do the discounted cash flow. So, it is not completely unreasonable to see the kind of multiples that we are seeing today. But yes, this is in anticipation of earnings, earnings improvements, and if that does not come to fruition, then we may see some correction in the sector.
As you mentioned, a rate cut cycle will benefit the BFSI space Overall, which IT company, according to you, would recover faster or benefit the most from this recovery that we might see in the BFSI space?
Abhishek Kumar: Yes, I think among large-cap companies, Information systems and TCS They have greater exposure to US banking, so they will benefit more. Wipro Also, given its exposure to consulting due to the Capco acquisition, it is also indexed to the improvement in the BFSI index in the US. So, these are the three large-caps that I think should improve on the back of the banking rally.
But from a risk-reward perspective, from a valuation perspective, from a growth versus valuation perspective, what are the stocks that you would recommend in the pecking order, because many… mid-cap stocks have increased considerably, a clear example being Tata Elxsi, for example.
Abhishek Kumar: Yes, we do not cover Elxsi, so I will not be able to comment on that. But in general, in mid-cap companies, yes, valuations have increased, so it is prudent to have companies where there is strong earnings visibility and in that parameter, Persistent systems and KPIT are our picks.
Despite the higher valuation of these two companies, earnings visibility is strong, wins etc. have been very consistent and especially in the case of Persistent, the high-tech sector which accounts for almost 40% of its revenue has not performed well and with the rate cut and improving demand in the US, if high-tech comes back, earnings momentum could really accelerate for Persistent. So, I think it is a stock that despite its higher valuation, we like.
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