Right time to buy small-mid-cap IT stocks?

Small and mid-cap IT firms are grappling with tepid demand,high attrition rates and expenses.

Small- and mid-cap IT companies are grappling with tepid demand,high attrition rates and a rise in expenses,resulting in strain on margins.

Most of the large-caps such as Wipro,Tata Consultancy Services Ltd and Cognizant Technology Solutions Corp are consistently beating market forecasts on strong demand for outsourcing.

On the other hand,firms such as Hexaware Technologies,Mindtree and Mastek are witnessing a slump in their net profit.

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Some others such as Polaris Software and Patni Computer Systems are only marginally faring better and are clouded in doubts about strength in margins and sustainability of growth.

However,some analysts believe mid-cap companies’ worries could be closer to their end with attrition rates coming down and demand picking up in a couple of quarters,helping these firms sail over to safer shores.

So,is the expectation of a turnaround reason enough to buy these stocks?

DEMAND TO PICK UP

Global spending on technology has recovered,boosting profits of the large-caps,and is slowly trickling down to the smaller companies as well.

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“Tier 2 companies benefit usually with a lag,” IDFC Securities analyst Hitesh Shah said. “With a year’s view,I would recommend ‘outperformer’ in mid-cap IT stocks like Hexaware,Mindtree and KPIT Cummins.”

Angel Broking analyst Srishti Anand said the discretionary IT spend is returning,benefitting niche companies such as KPIT Cummins and Sasken Communication Technologies.

“Right now,the spend has not come back in a very royal way for them,but it’s going to pick up. So it’s better to enter these stocks right now,” she said.

PRESSURES TO STAY

Although,companies have restored IT budgets,large clients are bundling their needs together and going to larger IT vendors such as Infosys and Wipro.

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“So all the Tier 2 companies,who used to provide small services,their work has been taken back and given to Tier 1 vendors,” Asit C. Mehta Investment Interrmediates analyst Hardik Shah said,adding that there is a lot of competition to get new projects among smaller IT firms.

Anand Rathi Securities analyst Naushil Shah said he expects attrition rates for small and mid-cap IT firms to remain high into the next year as their larger peers could continue to poach talent from them.

“For mid-caps,margin pressures are likely to continue this year and maybe next year a little bit,” he said.