Expect volatility over next 2 quarters in IT but there’s light at the end of the tunnel: Siddhartha Khemka

The big talking point is the IT sector. Finally, the Street is reading into the fact that there was nothing incrementally negative as far as commentary was concerned from HCL Tech and Infosys. While they did not give a very clear indication with respect to client budgets or growth outlook, there was also nothing incrementally negative. What is the best way to play the IT sector after the management commentary?
The market in the beginning went a little bit too negative on these IT stocks in the sense that they were expecting a much weaker commentary and that got accentuated because of the commentaries from Accentures and Capgemini. Then the HCL Tech December outlook dampened the sentiments around the IT companies but now with the large three – TCS, Infosys and HCL Tech coming out with a good set of numbers and also the commentary around them has not been that negative.

If you add to the improving supply side scenario, the attritions have come down, the salary expectations have come down and utilisations have gone up. All this put together definitely says that the worst or the bottom is done in terms of margins and growth for IT companies and from here, they could only see some improvement.

The outlook for the next two quarters is still hazy because of what is happening globally. There is not much clarity for the management. Companies are sitting on record order books yet again so the long-term visibility is still there. If you were to ask me how to play the IT space, one needs to digest the volatility that could come over the next two quarters but I see light at the end of the tunnel.

From a two-year perspective at least, if some were able to cross these two quarters, they would come out as winners in the IT space. We like TCS, Infosys, HCL Tech as our preferred picks within the IT space and our preference is more towards largecap than midcaps. Midcaps are definitely reporting higher growth but they are trading at a higher valuation plus the diversified book that the largecaps offer gives us some comfort that they will be able to cross this volatile phase and uncertain global demand environment much better and come out on the other side.

In terms of the real estate sector what is your top bet?
In the entire real estate space, the last couple of months we have been strong presales numbers and for the quarter also we have been getting business updates from a lot of other real estate players which are suggesting that presales have been pretty good.But what has happened with the stock prices is that earlier, post pandemic, when we saw the demand offtake, some of these stock prices had really done well and now with the interest rates rising cycle, the interest among the investors has waned a little and that has led to a little bit of subdued performance from a lot of these real estate companies.

Nonetheless, the registration data and the presales data corroborate the fact that there is a strong demand from the housing space of the real estate segment that continues to do well. So coming to the preferred picks, there are micro markets one has to look at from the real estate perspective. Within the Mumbai micro market, we like Lodha which is the

and . In the Bangalore region, we like Prestige and Brigade and in north India, we like .

What is your take regarding the entire metals space? It made a bit of a comeback Friday. Do you think it is just a one-day move or is there structurally a way to play this sector?
The entire metal space got a beating because of the fall in the commodity prices globally and from a result perspective, I do not think the Q3 numbers will be quite encouraging because of the very high base as well as the fall in commodity prices which are leading to lower realisations.

In terms of results, they are not going to be pretty strong. If you look forward, China reopening is a big theme for the global commodity prices and demand which could lead to some support for the metal stocks specifically. If you look at some of the base metal prices, they have been hitting three month, six month highs.

For example, copper and aluminium prices have been continuously on the rise and that theme would play out over the next few months with the Chinese new year ahead. Post the reopening and growth in the Chinese economy, metals could play a big role for the next three to six months.