Valuations Matter: Mid-cap IT stocks perk-up on cost factor

Premium valuations rather than bigger brandnames have caught the investors' fancy in the IT space of Indian stock markets.
The sector has emerged as one of the best performers during the pandemic period due to acceleration in adoption of digital solutions.

Accordingly, large-cap IT companies retained the overall investor interest, thereby growing their large capital bases even larger.

However, the demand for mid-cap segment firms' stocks outpaced those of the large-cap ones.

Besides, with cheaper acqusition costs, these counters offer margin protection due to operational diversification and better prospects of better RoI than their large-cap counterparts.

A flood of retail investors' funds and the charm of the IT sector play the role of major attraction points for the new participants.

The trend becomes evident with brokerage data, which show that during the last one month, 'Mphasis' stocks rose by 3.04 per cent followed by LTI (4.13 per cent), LTTS (2.09 per cent), Infosys (1.47 per cent), Persistent (1.39 per cent), Mindtree (1.04 per cent), HCL Tech (0.87 per cent) and OFSS (0.79 per cent) .


"As compared to large-caps, which have risen slowly in the last one month compared to the last full quarter, mid-cap stocks like Tata Elxsi, Mindtree, Mastek, Mphasis, LTI, LTTS and Happiest Minds have risen well even in the last one month, topping up a good three-month gain," said Deepak Jasani, Head of Retail Research, HDFC Securities.

"Mid-cap IT companies are present in the niche areas that may come in demand from time to time, have low base of sales and profits and have lower institutional ownership," he added.

According to Likhita Chepa, Senior Research Analyst, CapitalVia Global Research: "The rally in the tier 2 stocks of the IT sector is majorly due to the valuation gap between large-caps and mid-caps. Mid-caps are comparatively better valued.


"Although the valuation of the both tier 1 and tier 2 stocks appear to be stretched, the continued rush among retail investors is driving up the prices. With no major fiscal risks in the near term, investors are participating in mid and small-caps - IANS