IT Stocks Crash: Why are Midcap Names Like Persistent, Coforge Seeing a Bigger Fall?

The Indian IT sector, a bellwether for the nation's economic health, has been experiencing a significant downturn. While the broader market has seen fluctuations, midcap IT stocks, particularly names like Persistent Systems and Coforge, have witnessed a sharper decline. This has left investors wondering: what's driving this disproportionate fall?

The Broader IT Sector's Headwinds:

Before diving into the midcap specifics, it's crucial to acknowledge the overall challenges facing the IT sector:

• Global Economic Slowdown: Rising interest rates, inflation, and geopolitical uncertainties are impacting client spending, particularly in key markets like the US and Europe. This leads to project delays, budget cuts, and slower deal closures.
• Reduced Tech Spending: Companies are tightening their belts, leading to reduced discretionary spending on IT services. This directly impacts revenue growth for IT firms.
• Currency Fluctuations: The strengthening US dollar can impact the reported revenue of Indian IT companies, as a significant portion of their earnings are in USD.
• Increased Competition: The IT services market is highly competitive, with both established players and emerging startups vying for projects.

Why Midcaps Are Feeling the Heat More:

While large-cap IT companies like TCS and Infosys have also experienced a decline, midcap names like Persistent and Coforge are facing greater pressure due to several factors:

• Client Concentration: Midcap IT companies often have a higher client concentration compared to their larger counterparts. If a few key clients reduce their spending or delay projects, it can have a significant impact on their revenue.
• Niche Specialization and Sectoral Exposure: Many midcaps focus on specific verticals or technologies. If those areas experience a slowdown, these companies are disproportionately affected. For example, if a company is very heavily invested in the financial service sector, and that sector faces difficulties, that company will face difficulties.
• Growth Expectations: Midcaps are often valued based on their higher growth potential. When growth slows down, investors react sharply, leading to a more significant correction.
• Valuation Premium: Midcap IT stocks have often traded at a premium compared to large-caps, reflecting their higher growth expectations. As growth concerns mount, this premium is being eroded, resulting in a more pronounced fall.

Liquidity and Investor Sentiment: Midcaps tend to have lower liquidity compared to large-caps. During market downturns, investors may rush to exit these stocks,