Mid-cap IT stocks hog limelight

Low valuations and improving business visibility have triggered off fresh interest in mid-cap infotech stocks. Over the last one month, mid-cap IT scrips have beat both the Sensex and top tier stocks in the sector.

Analysts highlight several factors that are responsible for the trend. For instance, mid-cap IT stocks trade at much lower multiples compared with their larger peers.

In addition, with the growing maturity of the Indian outsourcing sector, investors are increasingly focusing on the ability of mid-cap players to ramp up aggressively, in a bid to win large-sized outsourcing contracts.

P Phani Sekhar, IT analyst, Angel Broking, said, "Valuations in select mid-caps are compelling vis-a-vis top tier players. Also, as the discounting of several mid-cap IT stocks is not too high, it does give investors some margin of safety, in case there is a correction in this sector."

As a result, mid-cap stocks such as PSI Data Systems have gained about 30.4 per cent over the past one month compared with an almost 6 per cent gain in the Sensex.

The BSE's IT index has fallen 0.6 per cent during the past one month. Also, during this period, Prithvi Information Systems has risen by 18.5 per cent and Mastek has grown by 11.35 per cent.

In contrast, Infosys has weakened by 2.4 per cent over the past one month, while TCS has fallen by 2.3 per cent. However, Wipro has bucked the general trend by gaining 13.6 per cent over the last one month.

Even after the current rally, PSI Data Systems gets a discounting of almost times trailing 12-month earnings, while for Rolta it is 15.3 times.

Mastek, too, gets a discounting of 13.1 times. In contrast, Infosys gets a discounting of almost 34.3 times trailing earnings, while for TCS it is 31.5 times. Wipro, too, gets a discounting of 40 times trailing earnings.