Small & midcap IT stks offer strong upside: CRISIL Research

2044 Investors following Infinite Comp. Share this News with them.

0

Like this story, share it with millions of investors on M3

Small & midcap IT stks offer strong upside: CRISIL Research

CRISIL Research believes that selective small and mid-cap IT companies offer strong upside from their current market price.

Post your opinion here

 

0

Tweet

Share on Tumblr

Infinite Comp BSE | NSE 30/05/12 Are Mutual Funds betting on Infinite Comp? Other Stocks in this news Omnitech Infosolutions | Polaris Financial Technology | Zylog Systems | Spanco |

CRISIL Research believes that selective small and mid-cap IT companies offer strong upside from their current market price.

"CRISIL Research believes that select small and mid-cap IT companies offer strong upside from their current market price. IT companies, especially small and mid-cap, have underperformed S&P CNX NIFTY (NIFTY) on account of margin-related concerns looming over the sector. However, some of these companies have good fundamentals and are well positioned to manage earnings pressure. CRISIL has equity research coverage on Infinite Computer Solutions Ltd, Omnitech Infosolutions Ltd, Polaris Software Ltd, Spanco  Ltd and Zylog Systems Ltd. At the current market price, the valuation grade for these stocks is '5/5', signifying strong upside (more than 25%).

"After a modest ~6% growth in FY10, Indian IT services exports grew by ~23% in FY11. CRISIL Research expects IT services exports to grow at a two-year CAGR of 18% to US$ 47 bn in FY13, mainly driven by volume growth. While large cap companies will continue to drive growth, small to mid-cap companies are also expected to benefit from the secular growth in the sector. According to Mr. Prasad Koparkar, Head - Industry and Customised Research, CRISIL Research, "While demand growth is expected to be healthy, margins are likely to be under pressure as most IT companies continue to grapple with issues such as rising employee cost due to wage inflation and attrition, flattish billing rates, higher visa costs and higher tax rates. We, however, do not foresee a repeat of demand-related concerns such as slowdown in the global markets as witnessed in H2FY09 and H1FY10."

"The equity market has reacted sharply to the margin-related concerns and ongoing uncertainty in Europe. On a year-to-date basis (as on July 01, 2011), the CNX IT Index dipped 10.8%, underperforming the NIFTY, which slipped 8.3%. Small cap IT stocks have significantly underperformed with ~18.5% drop due to lack of diversification. According to Mr. Tarun Bhatia, Director - Capital Markets, CRISIL Research, "Currently, the valuation discount for small and mid-cap stocks compared to large cap stocks is high at 65% vis-à-vis ~45% in FY07 and ~20% in FY08. We believe that IT companies under CRISIL coverage should register strong volume and stable earnings growth, and expect valuation discount to narrow during the current financial year." Further, at a one-year forward price to earnings ratio of less than 4x, the risk-reward ratio of these companies appears favorable as compared to large caps which are trading at 15-19x.

Disclaimer: CRISIL has taken due care and caution in preparing this Report. Information has been obtained by CRISIL from sourceswhich it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of any information and is notresponsible for any errors in transmission or for the results obtained from the use of such information / Report. CRISIL especially statesthat it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this Report.

To read the full report click on the attachment