Girish Pai on 3 IT stocks to buy and sell

We are neutral on IT sector. We should be neutral to the benchmark but within that, very selective and would likely pick HCL Tech and Tech Mahindra from a 12-month perspective, says Girish Pai, Head of Research, Nirmal Bang Institutional Equities Where do you stand when it comes to midcaps versus largecaps in IT? Which risk reward ratio pays off better?There is some value in largecaps compared to the midcaps. Prior to the pandemic, on January 1, 2020, the aggregate PE multiple of the tier II stocks (midcap stocks on a 12-month forward basis PE multiples) were at a 15% discount to the tier I stocks which are the top five players. Today as we speak, they are at about 40-42% premium to the tier I stocks. While it is true that the fundamentals have improved quite a bit in the next two- to three-year timeframe, growth is going to be far stronger than that would be for the tier I companies, at least on the earnings side. The valuations already reflect the good numbers that will flow through for some of these tier II companies and they are richly valued at this point in time. I would also point out that in a new tech capex cycle, the mid-sized players benefit quite a bit because the customers are more open to looking at new vendors and we have seen that happen now. We have seen lower prices helping the tier II guys. Some management changes in the tier II companies have actually led to a situation where better strategies are being put in place. We have more experienced managements, who have scaled up businesses there. Those have been the changes which have probably led to the kind of multiple expansions that one is seeing but it has been on the excessive side. So, we are neutral on IT sector. We should be neutral to the benchmark but within that, I would probably be very selective and pick HCL Tech and Tech Mahindra from a 12-month perspective. Will you give a miss to Mindtree? Yes I would. Mindtree is among the tier II stocks I actively track. Mindtree is a sell for me. It has been a sell for me for a while. While I do agree that the company has done exceedingly well from a margin expansion standpoint, that is largely because the margins being bombed out. We had a situation where EBIT margins collapsed from about 18-19% EBIT level six-seven years ago to sub-10% around the time of the acquisition by L&T. From there, we have seen a fairly sharp rebound in the last five-six quarters to about 17% levels at the EBIT side. The Mindtree earnings expansion has been more margin driven than revenue driven. I would still say that it has done a fairly decent job from a revenue growth standpoint in the last three-four quarters, delivering about 4-5% plus QoQ revenue growth. I still think that it will do well among the companies which will probably deliver high teens to low twenties kind of revenues growth both in FY22 and in FY23, maybe a little less in FY23. But at the current valuations, I would give it a miss.

from Economic Times https://ift.tt/3CR2CqL