Cyient, Persistent, Mphasis: Should you buy these midcap IT stocks?

Prabhudas Lilladher (PL) has initiated coverage on three midcap stocks namely Cyient, Persistent Systems and Mphasis, saying the outlook for the midcap IT firms remain strong for the rest of FY25.  IT stocks are trading at a premium of about 5 per cent compared to large cap peers, it said while suggesting 'accumulate' on Cyient and Persistent Systems and 'Hold' on Mphasis shares,  

PL said macro recovery is gathering pace and spending sentiment is improving. It sees midcap and smallcap IT outsourcing providers to benefit from niche and deep expertise developed within key verticals along with execution agility and flexibility. The domestic brokerage said these companies are participating in vendor consolidation and winning disproportionately over large caps. Enterprise deal sizes are becoming more fragmented and benefiting midcaps against one-shot large mega deal awarding to a single large vendor, in a bid to de-risk vendor dependency. 

Persistent Systems | Target price: Rs 5,320
PL expects Persistent Systems to outpace its peers in FY25 with dollar  revenue growth of 15.9 per cent YoY, followed by a strong rebound in the following years with a CAGR of 17.4 per cent over FY24-FY27. However, it sees margins to be rangebound in FY25, before improving 80 basis points (bps) and 70 bps in FY26 and FY27, respectively. It suggested a target price of Rs 5,320 based on 40 times FY27 earnings.

Mphasis | Target price: Rs 2,920
With mortgage rates in the US showing early signs of moderation and macro indicators turning positive, PL expects Mphasis' DR (Digital Risk) business to see a recovery from FY25 onwards. It expects revenue and earnings of the consolidated business to clock 10.7 per cent and 13.9 per cent CAGR, respectively, while estimating direct business to grow at a CAGR of 11.2 per cent over FY24-FY27E. PL suggested a ‘HOLD’ rating and a target price of Rs 2,920 based on 24 times FY27 earnings.

Cyient | Target price: Rs 2,130
PL expect Aerospace and Sustainability verticals to sustain the growth momentum and outpace consolidated revenue growth. Consequently, it sees Client's DET (Digital, Engineering, and Technology) dollar revenue and profit to grow at a CAGR of 6.8 per cent and 9.8 per cent, respectively, over FY24-FY27. 

"Our SOTP-based target price of Rs2,130 implies an upside of 6 per cent. We initiate coverage on Cyient with a ‘Accumulate’ rating; SOTP valuation implies target P/E multiple of 23x (DET business) FY27E," it said.