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Mid-tier IT firms losing steam now

Drop in share prices eroding mcap; NIFTY IT trading at a staggering 82% premium versus long-term averages

Mid-tier IT firms losing steam now
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Bengaluru: High valuation of mid-tier IT companies is slowly beginning to fade with correction in share prices last week. Analysts are of the opinion that valuations are stretched and are not in sync with revenue and margin growth prospects in coming quarters. Last week, share prices of most mid-tier IT companies and large IT services firms declined as broader index dipped owing to tapering fears. For instance, the share price of Mindtree, which rose a staggering 152 per cent in the last one year, dropped 7.57 per cent last week to Rs4,189.80. Mphasis, which has given a return of around 97 per cent in the last one year, saw its share prices correcting 8.40 per cent last week.

Another mid-tier IT company L&T Infotech, which had a stellar run, witnessed its share price falling 7.22 last week to Rs 5,758. Share price of Coforge was down by 4.44 per cent at Rs 5,277 last Friday.

Not only mid-tier IT companies, the large IT pack also witnessed selling pressure last week. The market capitalisation of Tata Consultancy Services (TCS) declined Rs 52,526.53 crore to reach Rs 13,79,487.23 crore last Friday. Similarly, valuation of Infosys tumbled Rs 41,782.4

crore to Rs 7,06,249.77 crore.

"NIFTY IT is currently trading at a staggering (around) 82 per cent premium versus long-term averages (more than 35 per cent in case of NIFTY) led by expectations of structurally higher growth post-Covid, and street's preference for 'relative' near-term predictability on the back of second wave impact on domestic sectors. However, global tech stocks like Facebook, Alphabet (parent company of Google), which are the primary beneficiaries of digital adoption are now way cheaper (22-23x, 1-yr forward PE) than NIFTY IT (32x) despite consensus expecting significantly higher growth rates for the former," said Sudheer Guntupalli &HeenalGada of ICICI Securities in a research note.

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Debasis Mohapatra
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