Technology Sector Update - Decoding Valuation Re-Rating In Midcap IT: Motilal Oswal
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Motilal Oswal Report
Valuations of IT services companies are at historically high levels, led by greater growth visibility and improved market position.
Moreover, the premium of tech price/earning relative to Nifty P/E has expanded to pre-global financial crisis levels.
Midcap IT has led this re-rating and is trading at a valuation premium versus largecaps.
We looked at the past behavior of midcap and largecap stocks to gain insights on the relative positioning within our coverage universe.
The two key takeaways from our analysis are:
The current P/E expansion in midcap IT Services has been led by higher growth differential versus largecaps both on a revenue/profit after tax (1.3 times/1.6 times of largecap) front on a FY21-23E basis.
Largecap IT has traded at a premium to midcap IT, except for two brief phases – CY14-15 (peaked at 57%) and CY18 (peaked at 49%). In both cases, the premium dissipated within a year.
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