Tier-II IT firms’ stock performance to remain subdued, mirror Tier-I companies

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Tier-II IT firms, following a robust stock market surge surpassing larger competitors, have experienced a more pronounced price decline post lacklustre Q4 results. Analysts anticipate mid-tier IT stocks performance to further moderate and the difference between the performance of both tiers will reduce. 

In the previous month, mid-tier IT company Birlasoft slipped 20.51 per cent, Cyient Technologies slipped 19.92 per cent, Coforge slipped 20.23 per cent, Persistent Systemsslipped 14.7 per cent, and Mphasis slipped 5.92 per cent on the bourses.

Tier-I fares better

In comparison, tier-I peers have performed better with TCS being up by 0.06 per cent, Tech Mahindra being up by 3.46 per cent, Infosys down 3.07 per cent and Wipro down by 1.59 percent, in the previous month. 

Tier-II has been outpacing the tier-I’s performance and had been trading at a premium to them over the last couple of quarters. However, the suggested FY25 outlook across the board has been lacklustre and has fallen below the anticipated line. The stock price correction was more pronounced in tier-II names than that of tier-I, which led to convergence in the valuation gap between them, brokerage Prabhudas Lilladher noted in a report. 

“We remain selective on the tier-I names that are carrying diversified business mix, and having built strong ability to capture the current enterprise spends. Additionally, with a median payout yield of 3.7-4.1 per cent y-o-y in FY25 or 26, makes tier-I even more attractive,” the report read.  

Also read: Infosys Q4 results: Are analysts not learning lessons or is the company faltering?

Even as mid-tier companies were promising bets given they recorded better growth rate than tier-1, now concerns have arisen about their future growth prospects. “Market is realising that mid-tier companies’ performance will not be very different from tier-I, they will also have growth struggles. Investors are also looking beyond IT and investing in sunrise sectors,” said Pareekh Jain, CEO at Pareekh Consulting. Going forward the stock performance of both tier-I and tier-II IT companies will be similar, and the difference between both will reduce. 

Omkar Tanksale, Research Analyst at Axis Securities, notes that the stock has been corrected as the valuations previously were high and companies are not able to maintain the high growth momentum given the market conditions. The stock performance of tier-I IT companies and tier-II IT companies will not be any different as there are no fundamental signs seen of revival, he added.