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Mid-cap IT sector 'clicks' with spate of deals; strong global growth possibilities in calendar year 2019

Amriteshwar Mathur

It's a trend that has caught many by surprise and just can't be ignored by Dalal Street and the broader tech sector€"the once-ignored mid-cap IT companies have seen a spate of deals over the past few weeks including hostile takeover offers and buyouts of promoter stake. No surprise that mid-cap IT stocks have suddenly become investors' favourite on hopes of merger and acquisition opportunities with leading tech players globally.

The latest deal announcement relating to mid-cap tech companies came on the weekend. And Baring Private Equity Asia and related entities have signed definitive agreements to purchase approximately 30 percent shareholding in NIIT Technologies from NIIT and other promoter entities at Rs 1,394 per share for nearly Rs 2,627 crore. In addition, the overseas acquirer will acquire an additional 26 percent stake via an open offer price of Rs 1394 per share.

The above deal is being done at approximately 19.9 times estimated consolidated earnings of NIIT Technologies for the financial year ended 31 March 2020.

Rajendra Pawar, chairman, NIIT Technologies, in a media statement said, "NIIT Technologies has long-standing relationships with marquee customers globally in several verticals including travel, banking and insurance. The involvement of Baring Private Equity Asia will provide further impetus to take the company to the next level of growth."

Earlier, in late March 2019, L&T had launched possibly the first hostile takeover of a tech company in India, by acquiring a 20.3 percent stake in Mindtree from VG Siddhartha and his related entities for Rs 980 per share along with placing an order to purchase an additional 15 per cent from the bourses and an open offer to purchase an additional 31 percent stake. And at the time of making the announcement€"L&T had valued Mindtree at nearly 19 times estimated March 2020 earnings.

Both the above announcements have resulted in mid-cap stocks being valued at similar levels to leading players in the Indian IT sector including TCS and Infosys. TCS, at Friday's close of Rs 2051.5, trades at nearly 22.8 times estimated March 2020 earnings, and it is 19.9 times for Infosys.

Investor interest on Dalal Street, both domestic and foreign investors, has largely been focused on the leading players like TCS, Infosys and Wipro, given their size and ability to implement complex IT projects on a global scale. However, analysts at leading brokerage houses tracking the IT sector highlight that attention is now shifting to mid-cap IT players, given their niche skills in outsourcing services and artificial intelligence along with hopes of merger and acquisition opportunities with leading tech players globally.

Meanwhile, Gartner, a global research and advisory company, had earlier forecast that global IT services segment would grow 4.7 percent y-o-y to $ 1.03 trillion during calendar year 2019 and 4.8 percent y-o-y during calendar year 2020.

Indian IT companies largely operate in the above segment and provide various global outsourcing services to a diverse group of sectors ranging from automobiles to insurance. Also, large and mid-cap Indian IT players are moving up the value chain in terms of services offered to global clients including artificial intelligence and data analysis, and it should help these players to grow their revenues over the next few quarters.

Nevertheless, in the key US market, the Donald Trump administration over the last two years has made it tougher for Indian IT professionals to get a H-1 B work visa or get it renewed, and to deal with this situation Indian players have hired more local staff in that country. Hiring American and foreign workers is more expensive vis-à-vis staffing costs in India and its puts pressure on operating margins on Indian tech companies. > Investors on Dalal Street react NIIT Technologies had ended Friday's trade at Rs 1349.5 and it has gained nearly 54 percent over the past one year. The stock had reached its 52-week high of Rs 1,425 on 3 September 2018.

Meanwhile, Mindtree ended Friday's close at Rs 952.3 and has witnessed some profit taking since L&T had made its announcement. The stock had reached its 52-week high of Rs 1181.9 on 11 September 2018 but then slumped nearly 36 percent to Rs 752.6 on 26 October 2018, at a time when the broader market was under intense selling pressure due to the liquidity crisis. The stock has gained nearly 26 percent since late October 2018.

Investors in mid-cap IT stocks should hold on to their holdings given strong global growth possibilities in calendar year 2019 coupled with possible M&A opportunities with leading tech companies.

(The writer is a senior columnist)

Also See: Baring Private Equity Asia to acquire 30% stake in NIIT Technologies for Rs 2,627 cr, to make open offer to shareholders

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