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Midcap IT cos outshine big boys; back on investor radar

Deliverable volumes in the majority of midcap stocks have either doubled or trebled in October.

, ET Bureau|
Updated: Nov 03, 2017, 09.59 AM IST
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To be sure, some experts cautioned that midcap IT companies are vulnerable due to their presence in select verticals.
To be sure, some experts cautioned that midcap IT companies are vulnerable due to their presence in select verticals.
Shares of midcap information technology (IT) companies are in demand after a long time because of better-than-expected earnings and relatively inexpensive valuations that afford room for re-rating upward.

With consistent expansion into newer services and markets, and sharper value offering to clients, midcap IT companies have shown robust growth in revenues in the September quarter, said analysts.

Stocks such as Sonata Software, KPIT Tech, Polaris Consulting, Mastek, NIIT Technologies, Hexaware Technologies, and Rolta India have risen between 15 per cent and 30 per cent in the past one month. By contrast, the Nifty IT index has gained just 3 per cent during this period.

Midcap IT cos outshine big boys; back on investor radar

“Large IT companies are growing at single digits, while their midcap peers are expanding at twice the rate. As a result, investors are willing to pay a premium for the growth momentum,“ said Ajay Bodke, CEO & Chief Portfolio Manager (PMS), Prabhudas Lilladher.

Even deliverable volumes in the majority of midcap stocks have either doubled or trebled in October compared to earlier months. For instance, the average daily delivery volumes of Mastek has risen to 1.93 lakh shares in October compared with an average delivery of 68,000 shares in September.Similarly , in NIIT Technologies, the average daily delivery volumes have gone up from 1.45 lakh per day in September to 2.34 lakh in October.

Focus on select verticals and limited geographic footprints often provide midcap IT companies with tailwinds the larger companies lack. “Midcap IT firms could do well in the coming quarters due to their expertise and exposure in select verticals. Many of them are in the domestic business, which could help them outperform large-cap IT stocks that are facing challenges in the US,“ said Vinay Khattar, head of research, Edelweiss Financial Services.

KPIT Technologies has reported a 5.5 per cent quarter-on-quarter growth in revenues for the September quarter, much higher than the Street estimates of 1 per cent.NIIT Tech stayed on the growth curve with 4.3 per cent sequential organic revenue expansion in the September, much better than expected. Hexaware has reported an EBIDTA margin of 18.3 per cent in the September quarter, compared to analyst estimates of 16.5 per cent, while its net profit was 22 per cent above that anticipated by analysts. Mastek's consolidated net profit for the September quarter more than doubled to Rs 17.5 crore.

UBS Evidence Lab survey findings show a steady increase in digital ranking and client mindshare for offshore providers. “From a technology shift perspective, we think the worst is over for offshore providers, contrary to market perceptions,“ said Diviya Nagarajan, analyst, UBS Securities.“However, revenue upside in the next 12 months is likely to depend on improving demand in sectors such as banking and retail and internal issues at some companies“.

To be sure, some experts cautioned that midcap IT companies are vulnerable due to their presence in select verticals.

“Midcaps will definitely do well, but one has to be very careful as heavy reliance on select verticals may unnerve investors if that section slows down“ said Bodke of Prabhudas Lilladher.
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