This optimism has been echoed by the managements of most large and mid-cap IT companies in the recent past.
Not surprisingly, IT stocks have been the darling of the markets -- the BSE IT index is up 42.4 per cent since July.
Most large-cap scrips (barring HCL Technologies) such as TCS, Infosys and Wipro trade at handsome valuations of 17-20 times their FY14 estimated earnings.
While mid-caps, too, have participated in this rally, the valuation discount with respect to the large-cap companies remains significant.
These mid-caps now trade anywhere between seven times (Polaris) and 15 times (Persistent) the FY14 estimated earnings.
However, investing in mid-cap IT companies is relatively risky given the volatile earnings trajectory and, hence, analysts believe the consistency premium that large-cap players enjoy over their mid-cap counterparts is unlikely to go down significantly.
Nonetheless, investors can still consider quality names in this space such as Hexaware, Mindtree and NIIT Tech, which have healthy earnings visibility and reasonable valuations.
Hexaware Technologies has made a niche in the airlines vertical and Peoplesoft implementation.
The management remains upbeat about the demand environment and has a strong deal pipeline.
While the top 10 clients continue to show healthy traction, robust performance of the Peoplesoft 9.2 upgrade is also likely to drive growth.
Additionally, the company gets 70 per cent of its revenues from annuity-based maintenance services and is, hence, less susceptible to any cuts in discretionary spends.
The key risk to its growth is an unprecedented fall in demand from any of the top 10 clients, which looks unlikely.
“We expect the company to post a rupee revenue CAGR (compounded annual growth rate) of 18.2 per cent over CY2012-14.
“While the Ebitda is expected to grow by 13.5 per cent in CY2014, net profit is expected to grow by 8.6 per cent, impacted by higher forex losses,” says Ankita Somani, IT analyst at Angel Broking.
She has a target price of Rs 130 on the scrip. For CY14, though, profits are expected to grow by 15-17 per cent.
Also, of the 25 analysts polled by Bloomberg since November, 13 have a buy rating, nine are neutral and the rest (three) have a sell rating on the stock.
Given their average target price of Rs 141, there is upside potential of about 16 per cent from the current level of Rs 122.
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