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Analysts bullish on mid-cap IT stocks as valuations turn attractive

They also remain optimistic on the road ahead for the IT sector given the sharp fall in rupee's value against the US dollar.

Swati Verma  |  New Delhi 

Analysts bullish on mid-cap IT stocks as valuations turn attractive

Infosys touched a fresh high of Rs 822.30 apiece on the BSE on Wednesday, after foreign brokerage firm UBS maintained a 'buy' rating on the stock with the target price of Rs 850. Thus far in calendar year 2019 (CY19), the stock has gained 23 per cent as against one per cent rise in the S&P BSE Sensex. In fact, the stock has done well since the presentation of the Budget in July – rising nearly 11 per cent at a time when the S&P BSE Sensex has slipped over 8 per cent.

Revenue visibility in the remaining part of FY20, margin improvement, market share gains and operating margin stability in the medium term are some of the factors that make UBS bullish on the counter. That said, the brokerage cautions against the softening trends in banking (BFSI), retail, manufacturing sectors that could impact financial performance in FY21.

Analysts also remain optimistic on the road ahead for the IT sector given the sharp fall in rupee’s value against the US dollar (US dollar). Thus far in CY19, the rupee has slipped over 3 per cent.

Investing strategy

So, does all this make the IT sector a good bet from a medium-term perspective?

Thus far in the calendar year 2019 (CY19), barring Tech Mahindra, all the large-cap have outperformed the market. Infosys tops the chart with over 23 per cent gains while Tata Consultancy Services (TCS) comes second with around 19 per cent gains. Noida-headquartered IT services company HCL Technologies has rallied 15 per cent during the period. In comparison, the benchmark S&P BSE Sensex has gained just a per cent.

Wipro has moved around 2.50 per cent higher while Tech Mahindra has slipped over 2 per cent. The S&P BSE IT index, on the other hand, has gained around 15 per cent, ACE Equity data show.

“We have been positive on IT for quite some time and the sector is doing well. As regards global markets, there are a lot of headwinds. IT companies, on the other hand, are getting a lot of fresh orders. That apart, For Indian IT companies, in particular, given steep fall in rupee and also the probability of weakness in the currency in the foreseeable future, their performance will be good,” said Sudip Bandyopadhyay, group chairman at Inditrade Group of Companies.

Mid-caps better placed

Although large-cap have eclipsed their mid-cap peers at the bourses, it’s the latter which, according to experts, will fare better given their attractive valuations. Large-caps, on the other hand, will continue to perform steadily, they say.

“We see Infosys and TCS as performers but I would prefer those stocks which have corrected and where the potential is a bit higher,” said AK Prabhakar, head of research at IDBI Capital.

Data-wise, mid-cap such as Tata Elxsi, Cyient and Mindtree have plunged 39 per cent, 32 per cent and 21 per cent, respectively on year-to-date (YTD) basis, while Larsen & Toubro Infotech, L&T Technology Services and Mphasis have lost 4 to 12 per cent, ACE Equity data show.

NIIT Technologies has outperformed the market by rallying 28 per cent. Other stocks that have given positive returns include Hexaware Technologies (up 16 per cent) and Sonata Software (up 3 per cent).

Among the lot, Prabhakar prefers L&T Technology Services (LTI), Tata Elxsi, Cyient and Mindtree at the current levels.

“Large IT companies have definitely outperformed, but select mid-cap companies have great potential. Valuation-wise, some of the mid-cap names that are worth looking at include Mphasis, Hexaware and Persistent Systems. They are showing good trends and the stocks have more headroom,” Bandyopadhyay added.

First Published: Thu, September 05 2019. 06:30 IST