mid-cap tech: Mid-cap tech counters could be ready for bullish breakouts

Mumbai: Several mid-cap technology stocks are on the cusp of another round of upsides. At least six such stocks are close to witnessing a bullish breakout after moving in a range in recent weeks. Analysts say the fourth quarter results which will be announced over the next few weeks could provide the impetus to many of these stocks as many companies could post their best sequential performance in a decade.

“While consolidation range breakout is being observed on select IT stocks, resumption of the trend is likely as base formation near the 20- & 50- DMAs in general acts as a good trigger in the short term,” said Sandeep Porwal, technical analyst, Ashika Stock Broking. Porwal said Mastek, Tata Elxsi, Sonata Software, Persistent Systems and

are among the mid-cap technology stocks seeing renewed buying interest.

Indian IT services companies are seeing an improvement in demand as businesses globally have accelerated their digital transformation journey in the backdrop of Covid-19. This is fueling improvement in revenue growth for the sector, said analysts.

“Following the ‘decade-best’ December quarter growth, we expect an encore with the sector set to post decade-best March quarter sequential performance,” said Apurva Prasad, analyst, HDFC Securities.

“The pandemic has evidently accelerated the digital transformation agenda and key lead indicators remain positive.”

Stocks such as Ramco System, Happiest Minds, Newgen Software, 3i Infotech, Subex, Firstsource Solutions, Subex, Mastek among others rallied between 3% and 9% on Thursday. IT stocks have significantly outperformed the broader markets in 2020 with the Nifty IT index rallying 55% as against the15% advance in the Nifty.

The outperformance could continue in 2021 despite rich valuations, as large deals are expected to drive revenue and profit growth, according to analysts.

“Valuations are at 2 standard deviation above historical average, albeit still in line with broader markets despite better growth visibility during the pandemic, and now as well,” said Rishi Jhunjhunwala, analyst, IIFL Securities.

“We expect multiples to sustain, while stock returns will come from earnings compounding and capital payout. We prefer Infosys and HCL Technologies among large-caps, Persistent Systems and Cyient in midcap as we believe these have the highest potential to surprise on earnings, which may not be fully pricedin yet.”

Phillip Capital is betting on Mindtree and Coforge, which could be the biggest beneficiaries of the ‘recovery in travel’ theme.