Go for IT companies with unique business model; not largecap and me-too midcap IT stocks: Dipan Mehta

Time of India

2 days ago

Dipan Mehta
, Director,
Elixir Equities
, suggests that the IT sector's future lies in companies with unique business models. He highlights smallcap firms like Newgen and
Aurionpro
as potential winners. GIS companies and Genesys are also mentioned as interesting prospects.
Persistent Systems
and
Coforge
are noted for their aggressive strategies. Mehta believes largecap and me-too
midcap IT stocks
may not offer significant returns, going forward.
We all know that this earning season will not come out with a good set of numbers. But if
Accenture numbers
are anything to go by, is there light at the end of the tunnel because it is not like this is going to be a dark tunnel for the rest of our life?
Dipan Mehta:
I think that what has happened is that basically there is a secular slowdown in the entire IT industry. The business model is such that they are going to be just about providing application, development, management, and the entire industry has moved to products and platforms. So, again, there is a structural issue in the Indian IT industry and I was quite hopeful that AI would be a trigger for higher growth but certainly that does not appear to be so.
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In fact, they may get disrupted because of artificial intelligence. And if you look at the 5-10-year track records, these companies at the end of the day have had high single-digit growth despite rupee depreciation. So, what is going to change it? I really do not know. The way the spend is happening in the tech industry, more and more is towards hardware, especially servers of the type that Nvidia makes or chips that Nvidia makes; more investment into data centres, storage capacity; and more investment into platforms and products.
Software as a service
is the new buzz word. It is a way to decrease cost and none of the traditional Indian
IT companies
are in that particular space.
So, they are going to get disrupted and we are going to see further slowdown there. So, my view remains extremely negative. Sure, there could be rallies. A surprising quarter with 15-20% growth is possible, but the long-term trajectory is very slow.
Even though you are largely negative when it comes to this sector, over the last couple of weeks, during sector churn, it has emerged positive for a couple of days. We have seen that the midcap end has done much better than the largecaps. If at all you had to play IT and if you are seeing any hope in this sector, do you believe it could come from the midcap end?
Dipan Mehta:
No. In fact, it has to come from companies which have a differentiated business model and which are more into products and platforms. Traditionally we had companies like Oracle and Ramco which were into products. There was Nucleus Software also but those have not done as well.
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There's a new set of companies and they are really smallcap companies. Companies like Newgen, Aurionpro, merit a mention over here, usually disclosure, we and our clients may be invested in them, and then there are GIS companies which are also there, as is Genesys, which is quite interesting, at the right place at the right time. Beyond that, there could be a few IT companies like Persistent Systems, or a Coforge, which are aggressive and which are in the right space. They may do well, but at the end of the day, the largecap IT stocks and a whole host of midcap IT stocks, which are doing a me-too type of a business, are not going to give great returns going forward.
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