Midcap IT Stocks Maybe A Sell Now, While Largecap IT Stocks Maybe A Buy

Brokerage firm, Motilal Oswal prefers largecap IT stocks to the small and midcap peers. "Midcap IT peers like Mindtree, Mphasis, COFORGE, and Persistent Systems are trading at a premium of 38% to TCS, Infosys,Wipro and HCL Tech. The current valuation premium is the highest since CY18. We see a favorable risk reward in largecap IT, given its relative attractiveness and strong positioning to end-to-end digital transformation," the brokerage has said.

According to Motilal Oswal over the past 1.5 years, there has been higher traction in medium and small size deals. This has expanded the addressable market of mid-tier IT companies. Despite higher traction for medium size deals, deal win momentum in Tier I IT has been as strong as midtier peers. "We expect increasing sizes for business transformation deals as these are early stages of digital transformation. We feel largecap IT is better positioned in a large deal heavy market, given their deep domain knowledge and capability to drive multiple large deals. This, coupled with relative valuation attractiveness, drives our preference for largecaps," the brokerage has said.

Decade high premium to the Nifty

According to Motilal Oswal, the NSE IT Index is up 22%/78% in the last three months/one year, and valuations for our aggregate coverage universe has soared to 76% above the mean. Its P/E premium relative to the Nifty is the highest since pre-GFC, at 38%.

"Indian IT Services companies have survived and thrived multiple technology cycles and have moved up the value chain. Technology has now become staple and non-discretionary. IT Services players have improved their market positioning in the enterprises' technology spending ecosystem, which has increased their relevance and stickiness. With technology becoming a differentiating aspect for businesses, the next decade will be an era of customization, which is beneficial to IT Services companies," the brokerage has said.

Disclaimer:

Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage houses are not liable for any losses caused as a result of decisions based on the article.