IT 2.0: after complete reboot, Infosys, TCS could make it

In a chat with ET Now's Nikunj Dalmia, Akash Prakash, CEO & MD, Amansa Capital and Manish Chokhani, Director, Enam Holdings, say among the 8-10 large Indian IT services companies, only two-three will succeed. Edited excerpts

Nikunj Dalmia: How can one can participate in Indian financials because that is the meaty part of the market?

Manish Chokhani: Lots of things are there. Housing finance, for example, is a whole big area. We have stocks like say Bajaj Finance. In consumer finance area, you have equipment finance, the Shrirams and the Sundarams of the world; you now have the microfinance sector which is really in euphoric stage currently. So it is just going to keep expanding and like I said today I think 30 per cent of our indices are way towards financials. The composition of that will change, it is not like this will become 50 per cent but it is not like 30 per cent of the market weight will go to 20 per cent either. So it is the best place to stay to have a substantial chunk of your money. We may have slight dissonance or disagreement today on tech. Our tech shares have got beaten up a bit unfairly because they are projecting 10 per cent growth. They are in a cusp of transformation and there is reengineering happening there because with the use of AI and tools like that, you would not need so many people. So there is a case for margin expansion which some of the CEOs have alluded to.

Akash Prakash: Like Sikka in India.

Manish Chokhani: Like Akash says, I can make money if my time horizon is different from the market or I find something which is not in the mainstream market. These are the two big ways to make money. So in the largecaps, whether it is Infosys or TCS, do you have a duration as frankly these are global companies now. TCS market cap is same as Accenture. Infosys is ahead of Cognizant but these four are really at the vanguard of the changes happening in the tech world. There is just IBM which is playing the what is in game which Infosys also is trying to sort of recreate. If these indeed become mainstream global companies, what happens to them? They would not remain where they are and they would not be priced the way we are pricing them today. So there is a case for change there. Again, like I was saying, my time horizon maybe very different from the average investors and it pays to be patient in franchises like this. You do not get quality companies like this very easily at the multiples they are currently at.

Similarly, in housing finance, I think HDFC has suffered for years and the smaller ones have run much faster but there may be interesting things happening in that space. For example, insurance listing is coming. There may be asset management companies getting listed. So there are interesting things happening in good companies which have become kind of boring and sort of discarded! You do not have to keep reinventing wheel every time. Sometimes, the old favourites actually do very well.

Nikunj Dalmia: Talking about the new reboot at Infosys or TCS, Chandra told me openly on a public forum that the digital business is growing at an outstanding rate of 50 per cent. That is an amazing rate. But can that really move needle for such large companies?

Manish Chokhani: That is what I am saying. Like in pharma, it may be 5 per cent of the business today. But three years from now, there will be a movement when you will suddenly wake up and say oh! my gosh this is so interesting! Like we used to say about Hindustan Lever in the old days and we said detergents and soaps is over, then one year the market got excited on personal products and rerated the whole company and then they went into food and then they got into squeezing working capital, releasing cash, their buyback, their dividends out... so a lot of things happened in a good company. Do you want to be in a melting ice-cream which is a lot of these bad companies where you want the last thing but time is your enemy, whereas in a good company, time is a friend in your business. And why do you want to give these up so easily and surely there are worst things in the market than some of these names.

Nikunj Dalmia: Three years, four years, what do you think the shape of IT could be from a market standpoint?

Akash Prakash: I think there is not much difference. But I think where I and Manish agree is that this industry is going through an inflexion point in the sense that service is alluding to the old classic model.

Manish Chokhani: The linear model.

Akash Prakash: The arbitrage, linear model is changing and Infosys to their credit has called this out very early. What is going to happen is there is going to be big differentiation in IT in the sense that Infosys may make it if Mr Sikka’s targets and goals are in any way near that.

Manish Chokhani: Even 80 per cent of that….

Akash Prakash: Yes 80 per cent of that is fine.

Nikunj Dalmia: That is a complete reboot. But if we achieve them, the stock should not trade here.

Akash Prakash: Correct. The only thing I would say is that everyone is not going to make that so I do not know. There are like 8-10 large Indian IT services companies. Not all will make it but two-three will.

Nikunj Dalmia: Which are the two-three which have the strong chance?

Akash Prakash: That I am not going to get into…

Nikunj Dalmia: Generally, I mean they are large companies so…

Manish Chokhani: Buy his fund.

Nikunj Dalmia: That is not opened to Indians.

Akash Prakash: Frankly, I think Infosys will make the cut. I think that Mr Sikka has been very early. He is a visionary on technology. He seems to now have really charged up the organisation. There is a lot of enthusiasm, momentum intact in the company. They have a good shot. Chandra clearly have an outstanding track record. TCS will make it. I mean the feedback we have is that they may be more quiet, less vocal than Infosys but not doing anything dramatically less or in no way inferior to Infy. These two I am pretty confident will make the cut. The rest frankly I do not know. I think one or two smaller companies which today we do not talk about or we do not even know will make the transition. Will the middle make it? I do not know.