After a weak March quarter show, the IT sector is expected to remain underperformer and disappoint Street for most of the current financial year FY24. Most experts remain negative on the sector on the back of weakness in demand and poor overall industry growth outlook.
However, despite the overall weak sentiment in the IT space as well as a poor outlook ahead, especially in the near-term, mid-cap IT stocks have fared better than large-cap IT stocks.
In 2023 YTD, the top performer in the Nifty IT index is mid-cap IT stock Persistent Systems, up over 27 percent as against a flat Nifty IT index.
Meanwhile, other mid-cap IT stocks Coforge, and LTI Mindtree also gave double-digit returns, up 16 percent and 13 percent, respectively, this year. L&T Tech also added around 7 percent in 2023. Mphasis was the only mid-cap IT company in the red this year, down 4.5 percent.
On the other hand, looking at large-cap IT stocks, Infosys was the top laggard in the IT index in 2023 YTD, down around 14 percent. TCS and Wipro were also in the red, down 1 percent and 3 percent, respectively. HCL Tech and Tech Mahindra were the only 2 large-cap IT stocks in the green, up 12 percent and 9 percent, respectively.
Similarly, in the last 1 year as well, the top 4 gainers in the Nifty IT index were from the mid-cap space. Persistent Systems topped the list with 49 percent gains followed by Coforge (26 percent), L&T Tech (24 percent), and LTIMindtree (20 percent). However, it is also important to note that the top loser in the index was also a mid-cap IT stock -- Mphasis, down 17 percent.
Among large IT firms, Infosys and Wipro shed 10 percent each in the last 1 year, TCS was flat but in the green and Tech Mahindra and HCL Tech advanced 14 percent and 18 percent, respectively, in this time.
In comparison, the Nifty IT has risen 6 percent in the last 1 year.
Let's now take a look at what analysts prefer - midcaps or largecaps?
Suman Bannerjee, CIO, Hedonova, prefers mid-cap IT stocks in the current scenario.
"Large-cap IT stocks are generally considered more stable and less volatile compared to mid-cap stocks. They are often well-established companies with a track record of consistent performance and may offer lower risk. However, the growth potential of large-cap stocks may be relatively moderate compared to mid-cap stocks. Personally, I believe that mid-cap IT stocks have more room to grow and can give higher returns. I prefer investing in mid-cap stocks," Bannerjee said. His top picks are KPIT tech and Tata Elxsi.
Sonam Srivastava, Founder at Wright Research, an investment advisory firm, also likes the mid-cap IT space.
"There seems to be a trend in the Indian market towards mid-cap IT stocks over large-cap ones, similar to the global trend. This could be due to a variety of factors, including a shift in investor sentiment towards companies with potentially higher growth prospects, which are often found in the mid-cap space," she explained. Srivastava likes HCL Tech, Tanla Platforms, Latent View Analytics and CE Info Systems in the pack.
Omkar Tanksale, Senior Research Analyst - IT, Axis Securities, also believes that in the current scenario, the mid-cap segment will likely outperform, compared to blue-chip peers, in revenue growth and margins. Superior mid-cap IT companies with strong execution capabilities will outperform in the forthcoming quarters, he added.
In a contrarian view, Nirvi Ashar, Fundamental Analyst, Religare Broking, prefers investing in large-cap IT.
"We would prefer investing in large-cap IT names due to attractive valuation at current levels and focus towards more long-term deals. The client preference in IT is undergoing change wherein their focus is shifted from short-term deals to more of medium to long-term with a focus towards transformation and cost optimization deals. So, for this, we believe large-cap IT is better placed and will continue to benefit," Ashar said. Her top picks in the IT sector are HCL Tech, TCS, and Infosys (with the same order of preference).
