Blame it on the shrinking margins or fears of a global recession, IT stocks have been under pressure. Sample this: Nifty IT is currently down over 27 percent from its all-time high of 39,446.70 it scaled in January 2022. Further, JPMorgan downgraded its Indian IT sector stance to underweight on 18 May 2022.
In the current environment, Envision Capital's Founder & CEO, Nilesh Shah believes that it's time to move to IT midcaps as the top 4-5 IT companies are likely to be under more pressure.
Explaining the rationale behind his stance during an interaction with CNBC-TV18, Shah said, "The technology service space is very interesting currently. There has already been significant price erosion. The top three-four big players in the IT sector are more likely to be under pressure as they have never had a robust demand environment. At the very best, their margins grew by 10-12 per cent, and therefore the impact of the margin pressures will be faced by them."
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He opined that the demand environment for some of the tier-2 midcaps, specialised players will get better and their ability to hold on to the margins will be good because their margins are a tad lower than large-cap names.
"If there's a rally, you should probably switch out from large-cap names and get into tier-2 names. It's quite possible that in next 2-3 years some of the names from midcap space will emerge to be strong performers," Shah said.
Speaking on the concerns surrounding the valuation reset post-pandemic and the high PE multiples that the shares of these IT sector stocks are trading at, he said that the multiples are likely to go down. If the US tech space and global equity market indices like NASDAQ are going to be under pressure, the valuations can soften, according to the expert.
However, when that happens, it is going to be crucial to differentiate between the IT companies that are going to grow by continuing business as usual and the ones which will witness significantly higher growth, he added.
Citing media reports, Shah said Quest Global, a global product engineering company, is likely to be sold out. The company is expected to be sold out at 20 times more than its earnings before interest, taxes, depreciation, and amortization (EBIDTA) of FY23 earrings. The private IT Sector sector is still witnessing transactions at current valuations or at premium valuations.
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