No sharp rallies ahead, expect incremental valuation re-rating: Chakri Lokapriya

Synopsis

Chakri Lokapriya discusses the impact of US tariffs on IT companies like TCS and HCL Tech, noting weak discretionary demand and sluggish order conversion. Paytm's profitability and margin improvements are highlighted, while Dixon Tech's strong mobile segment drives growth. HAL's potential is acknowledged, but further order conversions are needed to justify valuations.

"We've seen earnings from TCS and HCL Tech that reflect the uncertainty in the U.S., largely due to tariffs. Discretionary demand remains weak. The order books, however, continue to be fairly decent, though conversion remains sluggish. This pattern is likely to continue across the IT space until there's more clarity on tariff levels. U.S. companies are not just affected by India-U.S. tariffs, but also by the overall demand for technology services in the U.S. We might not have clarity on that for at least a couple of months," says Chakri Lokapriya, CIO-Equities, LGT Wealth.

A lot of earnings are going to be in focus. Let's start with Paytm, which has actually turned profitable. This time, the company has not only reported a profit of ₹123 crore, but the management also sees significant improvement in margins towards the year-end. So, on all fronts, the company has been performing well and has managed to regain investor confidence. But from these levels—after the kind of surge we've already seen in Paytm—how much more headroom do you believe the stock has? And how do you see the earnings moving from here?
Chakri Lokapriya: You’ve highlighted a couple of very important points—margin improvement and shareholder trust. Both have turned positive for the company, and that’s key. Now, the volumes in the business also need to catch up going forward, especially given that the stock has already run up significantly. However, with each successive margin improvement, we will see a gradual improvement in valuation. So, it’ll be an incremental increase, not the sharp jumps we've seen earlier.

What about Dixon Tech? Another strong quarter coming in. In fact, it’s another earnings candidate that has done very well. Very strong moves are visible in Dixon Tech’s financials, led by the mobile segment. How do you see this company—and the industry—shaping up going forward?
Chakri Lokapriya: The industry should hopefully do well. When I say "hopefully," it's based largely on tariff-related factors. But specifically for Dixon, their Q1 numbers were very good. Execution is strong, and their mobile business—an important segment—is also shaping up well. All of this is driving margin improvement, which in turn supports the company’s valuations. If the long-term secular growth rate over the next 2–3 years remains north of 30–35%, then as long as we continue to see improvements, the stock should perform well.

But from these levels—almost around ₹16,000 for Dixon Tech—how do you see the stock moving ahead? Any target you have in mind, especially considering the ongoing debate about high valuations? Of course, it’s backed by growth, but how long can that be sustained?
Chakri Lokapriya: The growth runway is fairly long—it has several years ahead of it. The stock has mostly been held back due to the uncertainty around tariff rates in India, which affects component costs. If we assign a slightly higher multiple than its current trading level, the stock could reach around ₹19,000–₹20,000 over the next few months.

Zensar Tech has delivered an in-line to slightly neutral quarter—no major surprises. Any views on this sector or the broader IT basket?
Chakri Lokapriya: In this sector, we've seen earnings from TCS and HCL Tech that reflect the uncertainty in the U.S., largely due to tariffs. Discretionary demand remains weak. The order books, however, continue to be fairly decent, though conversion remains sluggish. This pattern is likely to continue across the IT space until there's more clarity on tariff levels. U.S. companies are not just affected by India-U.S. tariffs, but also by the overall demand for technology services in the U.S. We might not have clarity on that for at least a couple of months.

Another focus area is defence. There’s positive news for HAL, especially with the demand for Tejas aircraft. The IAF is planning to retire the MiG-21 Bison fleet after 62 years, with retirement expected by late 2025. The fleet will then be replaced by Tejas aircraft, as per recent news reports. Do you still hold defence names close to your heart?
Chakri Lokapriya: Yes, these companies have done very well—HAL in particular. But now, we’re in a pause phase. Investors are waiting for further order conversions, which need to catch up with current valuations. The stock is definitely worth holding on to. These incremental orders will provide a marginal uptick. So, we may not see the kind of big bang moves we've witnessed in the past few months, but the stocks should continue to do well.

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