Nasscom guidance in line with expectation: Apurva Prasad, HDFC Securities

Talking to ET Now, Apurva Prasad, HDFC Securities, says incrementally digital will continue to be driving growth ahead.

Edited excerpts:

Does the Nasscom projection of IT sector growth come in line with your estimates?
Yes, it is pretty much there. Actually, for FY18, it is 7-8% and 7-9% for next year. It is not a major change from the current growth rates and it is actually not too much of a surprise.

Is 7-9% is broadly in line with the top large-cap names?
Yes. The likes of TCS and Infosys are probably expected to grow at about 8% CAGR from 2018-20 and to that extent it is pretty much there. HCLL Tech is expected to grow higher but there is an inorganic component there. Wipro is expected to grow sub that level. If you look at the overall large-cap space, that is pretty much where the average is. These numbers also include the captive data and a large part of the growth in the prior period was being driven by the captive business. Assuming the fact that captives are expected to grow faster, growth net of captives for Indian IT service providers should be slightly lower than the guidance of 7-9%.

Let us talk about the growth prospects because at the press conference, they spoke about segments like artificial intelligence, block chain. All of that is seeing fast traction while they did acknowledge that there is a decline in angel investments in series-A funding. Is that a concern and what is your outlook when it comes to AI taking over?
Broadly, digital -- whether it is in the ambit of AI, Cloud or automation -- encompassing all of that. It is all adding up and it is growing much faster. And now it is much more substantial part of the overall base. As it stands now, the industry growth of about 20% is coming from digital end and this is the component which is growing significantly faster. If you look at it, incrementally digital will continue to be driving growth ahead.

Apart from that, we were not really surprised they spoke about how digital now contributes about 20% of the industry exports. Given that digital is completely the way to go, they are expecting digital to grow at a rate of one and a half to two times going forward. Do you believe that a lot of mid-cap IT companies will stand to benefit given their phenomenal thrust on digital?
Yes, that is correct. Actually, we have been quite positive on the mid-cap IT space relative to the large-cap IT space. One clear differentiation is the fact that the digital penetration is much higher in the mid-cap companies. Most of the large-caps are currently operating with 20-25%, maximum 26% digital component. But in mid-cap IT, north of 40% is digital. That clearly tells you what is the biggest driver of growth and even if you look at it globally, what is happening with some of the larger software providers and their digital offerings trends continue to be quite positive and optimistic.

Most of the mid-cap companies have been re-rated. You are also positive on some of the mid-cap names. Do you think chances of mid-cap companies outperforming the 7-9% is higher and that is what investors are now betting on? Digital capabilities could be just a standalone company specific sort of a challenge. Do you believe that that is the reason why mid-cap IT is getting that re-rating in the last six to 12 months?
Yes, that is what we have been talking about too. The fact is mid-cap IT is actually growing almost 1.7-1.8x the large cap IT. That is the revenue growth and even the earnings side is growing much faster. There is a certain amount of premium which mid-cap IT will command for the kind of growth that it is doing. Purely from that standpoint and growth adjusted valuation, it still continues to be very attractive.