Motilal Oswal’s Gautam Duggad Optimistic On IT Sector Despite Muted TCS Show

Gautam Duggad, head of research at Motilal Oswal Institutional Equities, expressed optimism for the information technology sector in the upcoming quarter, despite a lukewarm start for some key players.

Speaking to NDTV Profit, he mentioned that there could be specific reasons for the tepid performance of players like Tata Consultancy Services Ltd., but the scenario looks promising for the overall industry.

“I’m not really disappointed with how things started for TCS. There could be segment-specific reasons, but we remain very excited about IT. In this quarter, we have further increased our weight in IT,” he said.

TCS posted a 1.1% decline in net profit for the September quarter at Rs 11,909 crore, well below the Bloomberg estimate of Rs 12,545 crore. The company's second quarter revenue, however, grew 2.6% at Rs 64,259 crore, surpassing Bloomberg's estimate of Rs 64,186 crore.

“We think IT provides a lot of stability from a top-down perspective,” Duggad added.

He also sees potential for TCS if growth continues, suggesting that the company could still play a significant role in their strategy.

When discussing the base case assumption for the IT sector in Q2, elaborating on the rationale behind their upgraded outlook, Duggad said, “When we upgraded IT to overweight back in July, we did so based on our valuations. After being underweight in IT for almost two years, we felt that the risk-reward scenario was more favourable.”

“Our view changed in large-cap IT in July. IT offers reasonable risk-reward, and we expect numbers and operational commentary to improve as we move into December,” the top executive explained.

Duggad acknowledged that while mid-cap IT stocks are currently perceived as expensive, a balanced portfolio incorporating both mid-cap and large-cap stocks is crucial.

“We shouldn’t go overboard in either mid-cap or large-cap,” he said, emphasising the need for diversification.

Shifting the focus to the automotive sector, Duggad shared insights on the company's positioning. “For almost two years, we were overweight on autos, but we went underweight in July,” he said. “This year, we are anticipating 7% growth, which led us to downgrade our outlook for autos.”

Duggad said that they currently have Mahindra & Mahindra Ltd. and have added TVS Motor Co. to their portfolio, aiming for a balance of both four-wheeler and two-wheeler companies. However, he expects FY25 to be "a very low-growth year for autos.".

On the topic of companies anticipated to report a strong performance, Duggad specifically highlighted Trent, stating, “We expect a strong performance from Trent this quarter.”

Addressing the cement industry, which has faced a challenging quarter with a reported 41% decline, Duggad commented, “This is how cement behaves. Last quarter was bad; this quarter is weak, and we expect a 30% earnings decline in the December quarter as well.”

He expressed concern about the stagnation of volumes year-on-year, noting, “It’s been a long time since we’ve seen a flattening of volumes. The hope is that around March, those volumes will start to increase.”

Duggad pointed out that the current pricing environment is creating a double whammy on Ebitda margins in the cement space.