The latest sector that is buzzing and making news in this season of downfall is the IT sector where we see that the small and mid-cap stocks look promising. The strong upside bias is mainly due to the CAGR growing at the rate of 18% compounded for the past 2 years.
The wage inflation and the talent management issues that the sector currently faces can be dismissed to be margin dilutive and not looked upon as demand destructive. We should see that the demand for these stocks will be very strong owing to an investment of $17 billion expected in FY13.
We put a strong buy on the small and mid cap IT stocks as our view says that they are to grow maintaining stable earnings growth potential Stocks like Spanco Ltd, Zylog Systems Ltd, Polaris Software Ltd and Computer solutions Ltdare showing strong ROE with small P/E which favors the risk and reward trade off.
We expect a strong growth base on value mainly because of three factors.
1. Demand that has for long been pent up
2. The return and rise of the transformational deals in the sector seen quite recently and
3. A sudden surge in the Mergers and Acquisitions in the Banking and Financial Services sector that will further surge demand.
Bell the Bull says: Growth during the last year was basically dependent volumes; the future growth however shall see more billings basically owing to the transformation in the service line mix and the rise of the transformational deals.