Small IT flaunts strong numbers, spark for even better show
Mumbai; Smaller information technology stocks hogged the limelight in Thursday's trading after they posted strong earnings growth in the third-quarter, and painted a positive outlook. Analysts said bullish commentary indicates that these IT companies could outperform their larger peers as profitability is likely to grow in the next few quarters though rich valuations remain a key concern with uncertainty over the new US administration's policies looming large.Coforge and Persistent Systems soared 11.5% and 10.3%, respectively, on Thursday. KPIT Technologies and Mphasis gained over 3% each, while LTI Mindtree and L&T Technologies rose 2.4% and 1.06%, respectively. Cyient moved up 2%."The impressive results from Persistent Systems and Coforge sparked a rally in midcap IT stocks today," said Krishna Appala, senior research analyst at investment firm Capitalmind. "The commentary from midcap IT companies remains strong."In 2024, the Nifty IT index surged 22.8% while the benchmark Nifty gained 9.1% in the same period.117501984The outperformance of these stocks has made some analysts cautious about their prospects as investors await the finer details of Trump's economic policies."Given the expensive valuations in most of the midcap IT stocks and some of the largecap names as well, any negative change in Trump's policies could be a headwind as most of the positive are already priced in," said Sumit Pokharna, VP and IT analyst, Kotak Securities. "KPIT Technologies, L&T Technologies, Tata Technologies are trading at expensive valuations."Coforge, Cyient and LTI Mindtree are his preferred stocks in the midcap IT space.Brokerage Bernstein said it sees the US government's DOGE (Department of Government Efficiency) to benefit the IT sector, though investors are concerned about its impact on IT spending."The objective of DOGE is to shrink federal manpower while maintaining the core services. This would lead to a "core system modernisation cycle" which will benefit growth for US and India IT services," said the firm.Analysts said smaller IT companies could benefit more than the larger companies if the spending in the US continues."Although valuations are relatively high, midcap IT companies are showcasing strong growth visibility, suggesting they are well-positioned to outperform their large-cap counterparts," said Appala.He said that the rally in midcap IT companies is likely to continue, as these firms offer higher growth potential from a smaller base compared to their large-cap peers.
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