FIIs shun big IT stocks; raise stake in mid-cap cos on attractive valuations

Foreign funds have taken a fancy for Indian mid-cap information technology companies due to attractive valuations and strong revenue growth potential. Overseas investors have raised stake in midcap IT companies in fiscal 2010-11, while mostly trimming holdings in large-caps, according to data compiled by ET Intelligence Group. Mid-caps in which foreign institutional investors have more than doubled stake during last fiscal include Polaris Software , Subex, Glodyne Technoserve, and KPIT Cummins.

They have also significantly raised stake in Persistent Systems , e-Clerx, Redington India and NIIT Technologies . During the same period, large-caps including Infosys and Wipro experienced fall in FII ownership, while TCS saw foreign fund stake remaining steady. The preference has been clearly for companies with strong revenue growth potential, offering niche services that enable them to maintain margins, and reasonable valuations.

"Even within mid-caps FIIs have increased exposure to companies with revenue growth and margin expansion visibility or companies with proven track record in the past four quarters which can lead to price-to-earnings multiple re-rating," said Pankaj Pandey, head of retail research with ICICI Securities. Large-cap IT companies are trading near peaks with forward multiple of 22 times fiscal 2011-12 earnings, Pandey said. This along with lack of fresh triggers leaves limited room for upside in near term.

On the other hand, institutional interest in tier-II companies has increased due to expectations of above-industry growth rate. Also, in terms of valuations many of the mid-caps are trading at significant discount to their peers. There are companies in the mid-cap space that have invested during the slowdown and are better placed to take advantage of the changing scenario, analysts said. Foreign funds have raised stake inSubex to 19.89% from 11.80% in last fiscal. Subex, which offers solutions to global telecom companies, had order book of $92 million at the end of 2010-11, up 45% from a year ago.

It reported sustained improvement in profitability over the past six quarters helped by nonlinearity of business model, where incremental revenues are not completely dependent on addition of employees. Mid-cap IT companies have not rallied post-recession as large companies gained market share of existing outsourcing contracts that further led to increased poaching within the sector, analysts said. This affected revenue growth of mid-sized companies. Some analysts sounded a word of caution on mid-cap IT firms due to high attrition rate as they cannot match the pay packages of their larger peers.

http://economictimes.indiatimes.com/markets/analysis/fiis-shun-big-it-stocks-raise-stake-in-mid-cap-cos-on-attractive-valuations/articleshow/8576643.cms

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Monindro Saha

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