Dipan Mehta on what to buy in IT large & midcaps | Economic Times

Within largecap IT, our top pick remains HCL Tech followed by Infosys but for building a portfolio in midcap IT, one should consider the likes of Mphasis, BFL, Coforge, MindTree and the L&T twins, says Dipan Mehta, Director, Elixir Equities. What have you made of the Q1 numbers so far and while the picture may be a bit distorted because of the base effect what do you think is in store for India Inc next given the commentary that we have heard?This is a very confusing earnings season and although optically companies are reporting 50-70%, even doubling of profits, but you cannot consider that because last quarter year on year was a complete washout. And when you compare it with the March quarter, quarter-on-quarter is also not comparable because March is a very typical quarter where a lot of companies tend to bunch up their sales and report excellent performance in the last quarter of the year. So whatever numbers have come in this particular earnings season, we need to take it with a pinch of salt and do a further analysis as to what is happening in the underlying business. By and large, I am not that enthused by the earnings which have come so far. There have been a few good numbers from the technology space, the software companies. But apart from that, one cannot say with great conviction that this has been a superb earnings season so far and that from this point on we should see significant improvement. All eyes have to be on how normalcy returns and how the lockdown relaxation takes place and whether there would be a third wave or not. So far there is no indication of that. My sense is that once the investors, companies, consumers know that there is going to be no third wave, then perhaps one major risk factor would be out of the market and we could see the resumption of the bull market. What is your take then on IT, the most resilient sector? What about mid and smallcap IT? Do you think that we could see attrition pressures and labour cost pressures hit names beyond TCS, Tech M and Infy?Yes, you are right. But midcap IT has shown solid performance and because of their size and their niche position and their exposure to certain select high growth verticals within the IT industry, they were able to grow significantly higher than last year. All these companies have been around for a long time. The likes of Coforge, LTI, LTTS, Mphasis and MindTree have been around for a long time and they know how to manage these HR related issues. So rather than buying stocks like TCS, Infosys, one should make fresh investment in the high performing midcap stocks. We saw the numbers from Tata Elxsi, Coforge, Infosys and were very impressed with what they have delivered. My sense is that in the next six to 12 months, these companies will go from strength to strength. If you buy a basket of midcap IT, I am pretty certain that it will do much better than the TCSs or even Infosys for that matter. But for investors who want to have slightly safer approach, then within the largecap IT, Infosys and HCL Tech are poised to outperform their peer group, more so HCL Tech because its valuations are very attractive. If they are able to report a couple of good quarters or so, their PEs will get rerated higher. So within largecap IT, our top pick remains HCL Tech followed by Infosys but for building a portfolio in midcap IT, one should consider the likes of Mphasis, BFL, Coforge, MindTree and the L&T twins. All of these companies have performed significantly well over the past several quarters even when IT was not doing as well as it is doing just now. Now that the environment has changed for the better, these companies will accelerate their growth rates over the next few quarters.