Outlook worries: Investors turn cautious on IT mid-cap counters

MUMBAI: Sentiment is turning bearish on midcap IT companies on rising growth concerns for FY16.

Investors are offloading shares of midcap IT firms companies after their valuations surged sharply in the past one year.

“In FY15, cloud transitions started to impact growth rates for Indian IT companies, leading to investors getting jittery about the outlook and volatility of the sector, even as companies continued to generate strong cash flows and strengthened balance sheets," said an Anand Rathi report.

Shares of Persistent Systems have plunged over 15 per cent in the past three sessions after the company gave a profit warning for Q1FY16. According to the company, certain client-specific issues could result in USD revenue decline QoQ, whereas investments in SG&A and higher visa cost could drag margins.

“We see weakness in PES (ISV) segment of revenue for Persistent Systems, whereas IP and Enterprise are expected to deliver healthy growth. We revise our estimates down for FY16/17E and cut our target price to Rs 910 from Rs 1,000," said a Prabhudas Lilladher report.

Another company KPIT Technologies plunged in trade today to hit its 52-week low of Rs 85.05 after media reports that promoters are selling stake in the company.

The management has clarified to the stock exchanges that promoters are not selling their stake and there has been no change in the shareholding pattern of foreign portfolio investors and domestic institutional investors.

However, the management commentary has failed to boost sentiment in the counter. The stock has been under selling pressure since it announced bleak fourth quarterly numbers.

“We believe that the visibility of quarterly earnings for IT companies (including largecaps) is on a decline for various reasons; thereby heightening volatility in equity returns," the Anand Rathi report added.

Emkay Global Financial Services has maintained a 'Reduce' rating on Mindtree on outlook concerns.



“We see risks to both growth and margins for Mindtree and find the valuations expensive at ~20/17x FY16/17E P/E. REDUCE with an unchanged target price of Rs 1,150," the report said.

Kotak Institutional Equities has maintained ‘Reduce’ rating on Mphasis with a target price of Rs 375 on growth concerns from HP business.

“Mphasis management expects its non-HP business to grow in line with NASSCOM guidance in FY2016 and exceed over the next two years. This is on the back of deal wins following new initiatives and corrective measures. It expects EBIT margin to improve and stabilise in the 14-16% range," the report said.

“Visibility continues to be low in the HP business. Improved outlook for the non-HP business is encouraging. However, we expect a continued decline in HP revenues to constrain growth. Retain REDUCE," it added.