IT mid-cap names may be losing sheen

MUMBAI: In the last one year the Nifty IT Index has fallen 4.37% and this fall has had much to do with the fall in the stocks of heavyweight IT companies like Infosys, Wipro and Tech Mahindra which have fallen 14%, 8.7% and 4% in the same period. During this same period however, midcap IT names have served as alternative stock bets in the IT space. However stocks like Persistent Systems, Mindtree and NIIT Technologies may be losing their sheen compared to a year ago period, according to the current ratings by brokerage firms.

NIIT Technologies
Motilal Oswal has a neutral on the stock with a target price of Rs 470. The brokerage said with cash forming 22% of market cap, free cash flow yield of 10/11% and dividend yield of 2.7/2.9% for FY18/19E, it believes valuations provide ample support at current levels. It added that however, with growth trends, deal wins and order book failing to improve materially versus the past, it keeps its stance unchanged.

It said the quarterly order intake has remained subdued and inconsistent for multiple quarters. This has partly also been responsible for the stagnant executable order book of USD300m, which has largely remained range-bound for eight quarters now. It said without sustenance of the pick-up in order intake, growth recovery is likely to elude.

Mindtree
HDFC Securities has a sell on Mindtree with a target price of Rs 430. The brokerage said Mindtree’s growth will be constrained by deceleration in digital revenue, pricing pressure in renewals, lower profitability of digital, growth/ profitability hurdles in BlueFin and limited growth visibility within large accounts.

Persistent Systems
IDFC Securities has a neutral on Persistent Systems with a target price of Rs 640. It said management is confident of improving the growth momentum to low double-digits with operating margin improving to the high-teens by FY18 but that growth and margin improvement expectations are contingent on the successful execution of the strategy with IBM. It said it saw execution risks and rich valuations as a limiting factor for upside potential.