Brokerage Elara Capital has initiated coverage on mid-sized technology companies with buy ratings on three stocksLT Infotech, Zensar Technologies and NIIT Technologies.
The brokerage said new technologies are eroding long-held benefits to scale, which had resulted in large technology companies outpacing their smaller peers for two decades.
With new technology, whether it is API-led application development or Cloud migration of a business units applications, large project teams are no longer necessary, said Elaras analysts Ravi Menon and Ashish Agrawal in a report on Wednesday.
The brokerage has an accumulate rating on Persistent Systems, while on Mphasis, it has a sell rating citing high execution risk and unreliable reported metrics.LT InfotechCMP*: Rs 1,703 Target Price**: Rs 2,130The brokerage expects significant earnings upgrade for company.
Elara forecasts earnings growth of 20.9 per cent and revenue growth of 21.6 per cent on a compounded basis from FY18 to FY21.
The stocks premium valuations are justified, it said.
With higher growth, a proven ability to scale up clients better than peers and a broad set of growth drivers across all four dimensions, we think LTI deserves a significant P/E premium vs peers, due to likelihood of a much longer runway of growth, said Elara.Zensar TechnologiesCMP*: Rs 231.20 Target Price**: Rs 280Elara expects companys earnings to increase 36.3 per cent, revenues to grow 23.6 per cent and operating profit margins to expand 425 basis points from FY18 to FY21.
The brokerage said acquisitions continue to be used as tip-of-the-spear to get into new accounts and add vertical-specific capabilities, such as Guidewire implementation and support.
We expect current margins are suppressed due to investments in enhancing capability.
While we expect investments to continue at present level in absolute terms, we think company should see operating leverage for these investments, brokerage said.NIIT TechnologiesCMP*: Rs 1,152 Target Price**: Rs 1,410Elara said NIIT Tech is its second top pick after LT Infotech citing probability of significant earnings upgrade.
We see long runway of growth, given its demonstrated ability to add new client accounts and scale them to meaningful size, brokerage said.
Elara said stock could rerate once company starts winning larger deals that will lead to in-line growth or growth ahead of peers.
We expect NIIT Tech to enjoy a slight premium to peer group due to sustained growth and margin.
The company is likely to evolve into a significantly larger firm and expect long-term earnings compounding as a result of that growth, it said.