IT Sector Can Perform Better In Second Half Of FY25: ASK Hedge Solutions CEO
Investors can take a position from a medium to long-term perspective to start getting into the IT space, says Vaibhav Sanghavi.
Information technology is poised to do well on the revenue and margin front with a strong order book. The sector, which has been under pressure for long, can bottom out in the second half of the current financial year, according to Vaibhav Sanghavi, chief executive officer of ASK Hedge Solutions.
The discretionary spending was getting under pressure, but on the overall deal-booking, "we are very encouraged on how things are panning out", he said in an interview with NDTV Profit's Niraj Shah. "As per expectation, there is a possibility of scope for improvement coming in the second half of FY25."
On the margin front, Sanghavi said that generative artificial intelligence was bringing in some efficiency as well that people were not expecting. "Overall, on both revenue and margin, we may be bottoming out in the next quarter or two, with a better performance second half of FY25."
Investors can take a position from a medium to long-term perspective to start getting into the IT space, he said.
Volatility To Persist Due To Geopolitical Tensions
Volatility in the markets is going to stay a little elevated from both global and local perspectives, according to Sanghavi.
The hard-landing growth that was expected has not been the case, but the geopolitical tensions will jeopardise the outlook, he said. "These conflicts may affect some change but that is something we will have to wait. If that (Iran-Israel) continues, then there would be a sizable impact on those variables."
Volatility is there to stay for the next three to four months. Investors can stay invested if they have the appetite to brace that volatility, he said.
Sanghavi underscored that there are a lot of contradictions in the global market. In the US, the growth and the inflation print is strong, while China is fighting deflation and probably lower growth. Meanwhile, Europe is probably looking to push for rate cuts ahead of the Federal Reserve, Sanghavi said.
Investors must have a medium to long-term play in the renewables and sectors that will see structural reforms, he said, while talking about the Lok Sabha election.
Watch The Conversation Here
Disclaimer: The views and opinions expressed by the investment advisers on NDTV Profit are of their own and not of NDTV Profit. NDTV Profit advises users to consult with their own financial or investment adviser before taking any investment decision.
Edited Excerpts From The Interview:
Are you bracing for heightened volatility with a downward bias? While the situation erupted Saturday late night, it was contained within 24 hours because the world seems unable to afford another geopolitical conflict?
Vaibhav Sanghavi: I think, nobody can or nobody wishes to have an elevated or escalated geopolitical conflict.
But what we see from a global perspective and the way we see it is, it's currently an environment of loads of contradictions.
On one hand, when we see the US and when we see Fed, I think the growth numbers from a US economic perspective at the same time in terms of inflation have been pretty strong. On the other hand, I think China is kind of fighting deflation and probably very little growth.
Lastly, when we look at Europe, where we are looking at the possibility where they would probably push for rate cuts, probably ahead than Fed, which generally wouldn't kind of happen.
So all in all, a lot of contradictions. To take a summary out of it is basically that the growth which the world was expecting to be having a very hard landing, I think, that's gone out of the window. We are looking at the economy being much more resilient.
Of course, these geopolitical conflicts, you know, may affect some changes. But that is something we'll have to wait (and see) how that impact comes about, whether this conflict kind of continues. If that continues, then of course, there will be some sizable impact on each of those kinds of variables.
So volatility, I think, is going to stay a little elevated, both from a global perspective and local perspective.
Heightened volatility, higher commodity prices, typically negative for markets, per se in correlation basis. Our valuations, not necessarily cheap, even if they're not very expensive on a forward multiple basis.
Does this, therefore, lead to a higher case for sitting on a bit of cash if a portfolio can afford it?
Vaibhav Sanghavi: As a student of risk, we've always thought in a way that whenever there is a big binary event up the cards or up the sleeve, typically we as a fund from a long chart perspective go highly hedged. So, either we take a good cash call or go into an event kind of hedged to a great extent.
Now that doesn't mean that everybody should be doing that, because we are a risk-adjusted return fund and we are kind of an absolute return-oriented fund. But from a relative return mindset, it's difficult to take a call from a net cash perspective, purely because the amount of domestic inflow which has been there, you know, has been very supportive of the market.
Fit in case, in terms of an example, is the year 2022 when we actually saw through the year an outflow close to about $20 billion from an FPI perspective. However, it was kind of completely absorbed by the local kind of inflow.
So I would probably mention that yes, of course, volatility is there for the next 3–4 months. If somebody has that appetite to kind of brace that volatility, stay invested. If not, probably some might kind of take some amount of money from the table.
When I spoke to TCS, the commentary seemed to suggest that while they are confident on margins, the confidence on growth is difficult to predict. It's just that the macro environment is such.
Would you take a contra call on information technology, a defensive sector, consistently paying dividends, good cash flow, equity size consistently reducing due to buybacks? Does that become a great sector to look at or not quite as yet?
Vaibhav Sanghavi: The way we would look at it from an IT sector perspective, I think, let's segregate or slice that sector into few elements.
First is, basically the revenue growth that is one of the most critical aspects from the valuation parameters. Twelve months ago, when everybody was expecting growth to crash and interest rates going to kind of move down—which has kind of not happened—and because of that crash in growth, probably there would be pressures on the IT revenue.
Of course, in the intermediate period, we've seen the discretionary spend kind of getting some amount of pressure, but on overall deal bookings we are very encouraged by how things have been kind of panning out.
Now that's on the revenue side where as per expectations, I think there is a possibility of a scope of improvement coming in the second half of FY25.
Coming back to the margin, which is the other critical parameter on this, the way we're looking is of course, the sub-contracting is something which we'll need to take a close watch on. But at the same time, I think the generative AI is probably kicking in some amount of efficiency as well.
We do not have the exact quantum in how much bips, but we may be seeing some amount of efficiency getting in which people are not kind of expecting. In fact, with AI coming in, people were expecting the revenue pressures, which is not kind of likely to happen.
So all in all, probably there may be a case where on both these two parameters, both on the revenue and the margin we maybe seeing maybe bottoming out probably in the next quarter or two, with the second half of FY25 much better. So probably, I think, that is a trade from a medium to long-term perspective to start getting into the IT space.
Okay, well, metals are in focus today. The London Metal Exchange is now banning Russian metals. Aluminium surged in the last 24 hours, probably the best single day gain since maybe 1987, or thereabouts.
Vaibhav, does it in any fashion make metals an investable pocket? I hear murmurs of institutional money wanting to get parked in large metal companies in India as well. What's your sense?
Vaibhav Sanghavi: I think, metal for us, has always been a very tactical play in the scheme of things where a lot of variables kind of affect them, especially from a global perspective.
Now here is a case where, because of a technical reason and because of sanctions we are seeing a temporary kind of support in the base metal prices.
We strongly believe that metal prices on a secular basis, if they have to sustain or probably look up needs two things. One, that can be a cost push or second, there has to be a robust economic growth on a global basis.
Now, either of these two things is not something which we are currently witnessing. So, you might see a tactical play coming about purely because the funds are probably underweight as well... I wouldn't merit, you know, at this point in time looking at whatever variables are available for a more secular kind of run.
Philip Capital’s note spoke about some of the beneficiaries based on BJP’s manifesto in which, there was a lot of focus on the usual suspect areas—green energy, infrastructure, railways, etc. Are you constructive on these pockets? Incidentally, all of them are down in trade today.
Vaibhav Sanghavi: No. Of course, I think from a policy perspective, one thing that we've seen, over the last 10 years, in terms of a continuation from a policy document or manifesto as well is the continued focus on the supply side, at the same time with a vision of what we can probably achieve by 2047. Now, it's very refreshing to see the political party's manifesto looking at 25 years hence and the planning which accordingly goes into it.
Having said that, when we talk about supply side, I think, focus on PLI, Make-in-India and structural reforms on sectors like defence really makes us believe that this is a space to continue staying with, along with renewables of various kinds, right from solar, wind power, or probably effective use of energy in terms of biogas or probably hydrogen.
So, I think, a lot of play is there, largely focused on the supply side, which is what we will probably focus on from a medium to long-term perspective.
Among everything else, the consistent theme seems to be infrastructure. How do you dissect what to buy within that pocket—some from a tactical perspective, some from maybe a buy and hold for a period kind of perspective?
Vaibhav Sanghavi: See, when we talk about infrastructure, we've always focused on the ancillaries or the suppliers, which are likely to get benefited from that whole infrastructure boom.
One, purely because from a business model perspective, I think we want to be on an asset-light models, at the same time companies that can have the effect of operating kind of leverage as well, as you kickstart your higher sales, higher revenue, from your existing capacities.
So those are the segments you ideally would want to focus on as compared to your very, very asset-heavy or somebody who is doing this kind of capex.
Of course, those kind of capex companies would eventually benefit but there's a big gestation period in between, where the company would not be doing in terms of their profitability much.
So in the initial leg, focus on those kind of second-order beneficiaries, which can come across with a higher spend in terms of the infrastructure or probably capex. So that is how we would probably look at.
Everything from upstream oil to gas companies are active today. One can probably assign a reason to upstream oil and ONGC in particular, because Jefferies has initiated coverage on a buy rating, with a target price of Rs 390. Reforms in the sector are expected to benefit the company. Vaibhav, does upstream oil become a sector that you would consider?
Vaibhav Sanghavi: From an oil and gas perspective, of course, oil upstream would kind of be variable to what's happening from a geopolitical standpoint.
But from a longer term perspective and as we move towards renewables or probably more focused economy from a gas perspective, the spaces that we would ideally look for opportunities going forward would be PNG and hydrogen, which were highlighted in the manifesto.
As I mentioned, I mean upstream from an ESG perspective, longer term reducing the carbon footprint perspective, of course, tactically, it can pay you at this point in time because of what's happening from a geopolitical standpoint.
But from a medium to long-term (perspective), I think, our bets would rather go into biofuels, gas, hydrogen and so on and so forth.
How constructive are you on PSU because not just banks, but the other PSUs too, have kind of made wealth? A lot of people argue that now they are priced too much to perfection, don't leave any execution risks, premium on the table, etc. What are your thoughts?
Vaibhav Sanghavi: Absolutely. I think, while PSUs have rallied, they've done really well and created good amount of wealth. The valuations, the way they have been, the differential between a private company and a PSU company in terms of the valuation gap has diminished to a great extent.
Now, having said that, I'm not saying that we should not be looking at, in terms of constructive basis. The way we look at our overall PSU basket is those companies which are beneficiaries of the structural reforms vis-a-vis your commodities or cyclical plays.
The reform-oriented companies, which I did mention about earlier are the PLI, Make-in-India, something like a defence sector. Those are the places or those are the companies from the PSU basket that we would love to have an exposure to as compared to those which are purely cyclical and more driven by the commodity cycles, which we will probably avoid.
So, clearly, while they have gone up, there are still opportunities, which are actually coming from the overall structural reforms, which have kind of happened and where the government is kind of focusing on to create the kind of further supplie-side ease, from an economic standpoint.