IT index slips 6 percent in 5 days. Stocks to buy as recommended by Motilal Oswal

01 Oct , 2021 By : Kanchan Joshi

Nifty IT Index has slipped around 6% in the last five sessions. Though, IT stocks have been the major supporters of the recent market rally with the index up around 78% in one year. Therefore, the valuations of IT Services companies are at historically high levels, led by greater growth visibility and improved market position.

Motilal Oswal in a recent note said that midcap IT has seen a higher re-rating as against largecaps and has regained its valuation premium to largecaps after three years. There were only two instances in the past (CY14-15 and CY18) when midcap IT was trading at a premium to largecap IT, as per the brokerage.

Motilal continues with its positive view on the IT sector and prefers largecap IT as compared to midcap peers, given their relative attractiveness and strong market positioning. The long term growth outlook for largecap IT is equally strong. Moreover, largecap IT tends to narrow down the valuation differential over time. Infosys and HCL Technologies are its preferred picks within Tier I IT.

“Midcap IT peers like MTCL, MPHL, COFORGE, and PSYS are trading at a premium of ~38% to TCS, INFO, WPRO, and HCLT. The current valuation premium is the highest since CY18. We see a favorable risk reward in largecap IT, given its relative attractiveness and strong positioning to end-to-end digital transformation," the note stated.

The brokerage feels largecap IT is better positioned in a large deal heavy market, given their deep domain knowledge and capability to drive multiple large deals. This, coupled with relative valuation attractiveness, drives Motilal's preference for largecaps.

Meanwhile, the brokerage continues to expect a strong spending cycle for IT Services over the long term, driven by huge addressable opportunities from Cloud, constant evolution of technologies, and increased focus on outsourcing.