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

The IT sector, after lagging behind the broader Nifty in early 2024, has recently shown signs of recovery. The Nifty IT index has risen by around 12 percent year-to-date (YTD) in 2024, slightly outpacing the benchmark Nifty, which has gained over 11 percent during the same period. On a longer horizon too, the IT index has outperformed, advancing over 28 percent in the past year compared to the Nifty’s 24 percent rise.

In the June quarter (Q1FY25), the IT sector exhibited a broad-based recovery across major verticals and geographies, setting the stage for potentially strong performance throughout the remainder of the year. However, with optimism already reflected in current valuations, experts suggest there may be limited room for significant gains ahead.

The recent rebound in the IT sector has caught the attention of market watchers. Prabhudas Lilladher, a noted brokerage house, highlighted the sector's improving performance: “Q1 saw a rebound in operating performance after two consecutive quarters of weak topline growth. Although growth was partly aided by quarterly seasonality, the underlying demand has also been constructive across verticals and geographies.”

Stocks

This positive momentum has been reflected in the performance of individual IT stocks. Large-cap IT stocks, in particular, have shown better recovery this year compared to their mid-cap counterparts.

Among the largecaps, Tech Mahindra emerged as the top performer, rallying almost 20 percent, followed by Infosys and TCS, which posted gains of 18.7 percent and 13.5 percent, respectively. HCL Tech also performed well, up 10.5 percent YTD, while Wipro added 4.5 percent. LTIMindtree, however, was the only large-cap IT stock to be in the red, down over 14 percent.

On the other hand, mid-cap IT stocks, which led the gains in the Nifty IT pack earlier in 2024, have seen mixed results. Persistent Systems surged 29 percent, but other mid-cap names like Mphasis, Coforge, and L&T Technology Services posted declines ranging from 0.5 percent to 6.5 percent.

Expert Opinions on the Path Forward

As the IT sector continues to navigate its recovery, experts are weighing in on where investors should focus—large-cap or mid-cap IT stocks.

Varun Saboo, Head - Equities, Anand Rathi Shares and Stock Brokers, expresses optimism about the overall IT sector, particularly with the improving rate cut outlook in the US. “We believe IT should do very well overall considering the rate cut outlook improving in the US and the expectation of it happening in a hurry from here. We would recommend adding both large-cap and mid-cap IT, however, we expect outperformance in mid-caps going forward,” he suggests.

Omkar Tanksale, Senior Research Analyst – IT, Axis Securities, sees a growth edge in mid-cap companies but advises strategic investments. “We believe mid-cap companies outperform largecaps in terms of growth delivery due to smaller deal sizes. We also believe investors should invest in companies that are in a high-growth phase, with better client engagement and a stronger deal pipeline,” he recommends.

Aditya Agarwal, Head Derivatives & Technical at Sanctum Wealth, offers a more cautious perspective on mid-cap IT stocks, noting the recent rally’s impact on valuations. “In the recent rally, the mid-caps have seen a sharp up-move and have outperformed large-cap IT stocks. The valuations have turned expensive for mid-cap companies versus large-cap IT, and the latter is placed favorably as the spending environment slowly improves,” he explains.

The IT sector's recovery in 2024 has provided a boost to both large-cap and mid-cap stocks, but experts remain divided on which segment will outperform in the long term. While large-cap IT stocks offer stability and favorable valuations, mid-cap stocks present opportunities for higher growth, albeit with increased risk. Investors are advised to consider their risk tolerance and investment horizon when deciding between these segments, as the IT sector continues to navigate an evolving global economic landscape.

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.