Building an IT portfolio? Look at mid-cap stocks

The quarterly results of India's big four IT (information technology) players (HCL, TCS, Infosys and Wipro) have left investors confused, with no clarity on the sector's outlook.

While Tata Consultancy Services (TCS) and HCL Technologies recorded robust earnings despite the challenging macro environment, Infosys and Wipro were grappling with internal restructuring issues which overshadowed the profits they made.

Experts, however, suggest one should wait for some price correction to happen before investing.

...

HCL's stock price grew by two per cent in the five days, since the firm declared its first quarter result.

Though the net profit for Infosys went up 32.9 per cent to Rs 2,289 crore (Rs 22.89 billion) vis-a-vis the same quarter last year, the company failed to meet its dollar-term revenue expectations for the quarter.

It reported a revenue of $1,752 million against the projected $1,771-1,789 million. Wipro's net profit was also up 18.4 per cent on year-on-year basis.

But, Sandeep Muthangi of IIFL Capital stated in a report, "While both Infosys and Wipro have been late in adapting to the new demand environment, issues related to growth at the two companies are fundamentally different."

...

With the US and European markets going through a slowdown, these big players have little room to grow given their massive export base, say experts. Usually a weak rupee boosts IT companies' profits, but the prevailing weak rupee scenario also hasn't helped much.

Hence, while the sector will continue to see growth, the rate could be lower. Software services industry body Nasscom has estimated the sector to grow by 11-14 per cent this financial year.

G Chokkalingam, executive director and chief investment officer, Centrum Wealth Management, says there is limitation on the growth of big IT players and their wealth creation story is over.

...

"If one wants to build his IT portfolio and has a longer horizon, he should include good mid-cap IT stocks in their basket now."

Dipen Shah, senior vice-president, PCG Research, at Kotak Securities, says the IT sector is giving no clarity on its outlook because of the top four players two appear strong whereas the other two look cautious. "Hence, it makes sense for one to have a mix of large-and mid-cap stocks now."

Investors should have a horizon of at least two to three years while building their portfolios.

...

But, if one wants to build a diversified portfolio, then ideally he shouldn't have exposure of more than 5 to 10 per cent to any one sector, experts say.

"If one has a short-term horizon of six to eight months, it makes sense to buy Infosys because at present it is commanding the lowest P/E (price to earnings ratio) among the top four IT firms," says Chokkalingam.

"Although TCS is trading at a reasonable valuation, HCL stock prices are expected to correct by 5 to 10 per cent at least," says Harit Shah, senior research analyst at Nirmal Bang Institutional Equities.

...

Experts say a few mid-cap IT stocks, which look attractive now, are Hexaware, Polaris, NIIT, Geometric Software, Aptech, Mastech, KPIT Cummins and MindTree.

"One can buy Geometric Software and KPIT Cummins as they have reported good numbers over the last two quarters. Since their line of business is also in manufacturing and automobiles, they make for a good buy," says Shah.

While investing in a mid-rung IT company, one should check the quality of their management, cash on books, dividends declared and promoter stakeholding.

The company should focus only on few verticals and industries instead of many in order to go up the value chain.