IT sector midcap stocks in for earnings acceleration; buy these three stocks to ride the wave

The information technology sector’s midcap players are now in a phase of higher earning acceleration while large cap stocks could witness revenue acceleration and margin expansion, brokerage and research firm Edelweiss Securities said in a note. The report argued that IT sector’s midcap players are in for a growth that they saw during 2013-2015 when mid-caps re-rated owing to high growth on the back of a demand spurt in Infrastructure Management Services and Packaged Solutions implementation. Analysts at Edelweiss have picked their top favourite stocks in the midcap space that could be best placed to ride on this phase of growth that the brokerage firm is expecting. 

L&T Technology Services Ltd.

Target price: Rs 2,009

L&T Technology Services share have now surged 56% from their March lows. The report says that their analysis based on segmental revenues and discussions with management indicate that the ER&D space has been the worst hit due to the current pandemic. “Our discussions with experts suggest that plants are now opening up across client markets and even the transportation vertical is making a strong comeback,” it said. It predicts that L&T Technology Services will see a 5.5% slip in USD revenues in this fiscal, followed by a 18.6% growth in the next fiscal year. The stock is trading at 18x FY22E EPS according to Edelweiss’ estimates. An upside of 26% from current levels could be expected.

Mindtree Ltd.

Target price: Rs 1,460

Shares of the IT firm are up 71% since March when the market witnessed an intense sell-off. The stock has been dubbed as a potential large cap by the report. “We believe pandemic-led online explosion has accelerated demand for cloud and digital; additionally, higher acceptability of the work from anywhere (WFA) model implies substantial margin tailwinds, paving way for high teens EPS CAGR FY22 onwards,” it added. A further re-rating is expected for the stock to push it in line with global peers. Mindtree reported a strong order book of $391 million (up 20% YoY), including $315 billion of renewals. Microsoft is one of the biggest clients of the company but too much dependence on a single client has been termed as a risk on the stock. For Mindtree shares to reach the target price they need to jump 17.7% from current levels.

Persistent Systems

Target price: Rs 1,344

Analysts at Edelweiss say that their thesis of a turnaround in Persistent Systems led by a revitalised sales engine aided by sectoral tailwind and new leadership. “We believe pandemic-led online explosion has accelerated demand for cloud and digital adoption and transformation of the core. Persistent’s strong capability in digital and hi-tech space augurs well for it to capture this wave sustainably,” the report said. Although the stock has surged 151% since its March lows, Edelweiss expects another 13% upside on the stock.  

(The stock recommendations in this story are by the respective research and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)