Prabhudas Lilladher favours mid-cap IT over large-caps: Initiates coverage on Cyient, Persistent Systems and Mphasis

The brokerage Prabhudas Lilladher highlights challenges for large-cap IT stocks affecting mid-caps but remains optimistic about the latter. They initiated coverage on Cyient, Mphasis, and Persistent Systems, citing potential growth due to niche expertise and market dynamics.

Pranati Deva
Published4 Sep 2024, 03:50 PM IST
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Why is Prabhudas Lilladher is more positive on midcap IT stocks than largecap ones, initiates coverage on 3 stocks
Why is Prabhudas Lilladher is more positive on midcap IT stocks than largecap ones, initiates coverage on 3 stocks(Pixabay)

In a recent report, domestic brokerage firm Prabhudas Lilladher highlighted the current challenges large-cap IT stocks face due to a tough demand environment. These pressures have also now extended to mid-cap IT stocks, causing notable volatility in their operating performance. 

Despite these near-term difficulties, the brokerage remains optimistic about mid-cap IT stocks for the remainder of FY25, noting that these stocks are currently trading at a premium of arounf 5 percent compared to their large-cap counterparts. 

The brokerage emphasised that the broader macroeconomic recovery and improved spending sentiment could position mid-cap IT outsourcing providers to capitalise on emerging opportunities.

Also Read | IT stocks are surging on hopes of a rate cut, but it’s too early to celebrate

Prabhudas Lilladher highlighted several key factors driving this potential upside for mid-caps: their niche expertise and deep understanding of key verticals, which allows for greater execution agility and flexibility; their active participation in vendor consolidation processes, where they are increasingly securing a larger share of contracts over large-cap firms; and the trend towards more fragmented enterprise deal sizes, which favours mid-cap players over the traditional large, single-vendor deals.

Given these favourable dynamics, the brokerage has initiated coverage on Cyient, Persistent, and Mphasis, identifying them as strong contenders in the evolving IT services landscape. The firm believes these mid-cap IT companies are well-equipped to navigate the current market environment and deliver solid performance in the coming quarters.

Also Read | Axis Sec lists KPIT Tech and Persistent as top Tier-2 IT sector picks post Q1

Overall IT sector outlook

Prabhudas Lilladher expressed a positive outlook on the broader theme of IT services outsourcing spending by global enterprises, particularly for modernising or transforming their operations. The firm noted that while enterprises had recently focused on savings-led transformation deals, the improving macroeconomic environment was expected to boost sentiment and potentially lead to the resumption of long-deferred discretionary programmes by late FY25 or early FY26. This shift could result in the execution of multi-year large transformation or legacy modernisation deals, thereby enhancing revenue conversion.

Citing Gartner, Prabhudas Lilladher highlighted that Indian IT services growth was projected to continue outpacing the global market and other key geographies significantly, with an expected compound annual growth rate (CAGR) of approximately 10 percent over CY23-28E. However, the firm also maintained caution regarding the near-term US election outcome, which could delay deal closure activities or the execution of projects with a higher onsite mix.

Also Read | Nifty IT up 24% in 2 months. What should investors do? Here’s what 5 experts say

Stocks

Prabhudas Lilladher shared insights on several companies, including Cyient, Mphasis, and Persistent Systems, projecting growth trajectories for each.

For Cyient, Prabhudas Lilladher anticipated that the Aerospace and Sustainability verticals would continue to drive growth, outpacing consolidated revenue expansion. The firm estimated that Cyient’s DET USD revenue and INR PAT would grow at compound annual growth rates (CAGR) of 6.8 percent and 9.8 percent, respectively, over FY24-FY27E. Based on a sum-of-the-parts (SOTP) valuation, Prabhudas Lilladher set a target price of 2,130, suggesting a 6 percent upside, and initiated coverage with an ‘ACCUMULATE’ rating, implying a target price-to-earnings (P/E) multiple of 23x for FY27E.

Regarding Mphasis, the firm noted early signs of moderation in US mortgage rates and positive macro indicators, which could lead to a recovery in the DR business from FY25. Prabhudas Lilladher projected that the consolidated business’s revenue and earnings would achieve CAGRs of 10.7 percent and 13.9 percent, respectively, while the direct business was expected to grow at an 11.2 percent CAGR over FY24-FY27E. The firm initiated coverage on Mphasis with a ‘HOLD’ rating, setting a target price of 2,920 and a P/E multiple of 24x for FY27E.

Also Read | IT Sector: Largecaps or midcaps? Here’s what market experts prefer going ahead

For Persistent Systems, Prabhudas Lilladher expected the company to once again outperform its peers in FY25E, with USD revenue growth of 15.9 percent year-on-year. The firm also anticipated a strong rebound in subsequent years, with a 17.4 percent CAGR over FY24-FY27E. However, they projected that margins would remain range-bound in FY25E before improving by 80 basis points (bps) and 70bps in FY26E and FY27E, respectively. Prabhudas Lilladher initiated coverage on Persistent Systems with an ‘ACCUMULATE’ rating, setting a target price of 5,320 and a P/E multiple of 40x for FY27E.

Prabhudas Lilladher's analysis underscores a positive outlook for mid-cap IT stocks, driven by their niche expertise, agility in execution, and participation in vendor consolidation. The firm has initiated coverage on Cyient, Persistent Systems, and Mphasis, identifying them as strong contenders in the evolving IT services sector. While caution is advised regarding the near-term impact of the US election on deal activities, the firm remains optimistic about the long-term growth prospects for Indian IT services, anticipating strong revenue growth driven by a global push toward modernisation and transformation initiatives.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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First Published:4 Sep 2024, 03:50 PM IST
Business NewsMarketsStock MarketsPrabhudas Lilladher favours mid-cap IT over large-caps: Initiates coverage on Cyient, Persistent Systems and Mphasis

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