Nilesh Shah, MD & CEO of Envision Capital, on Wednesday, said that the midcap IT stocks warrant caution.

Share Market Live

NSE

“Midcap IT segment does warrant caution at these kinds of levels. There has been a massive rerating and most of these midcap stocks in the technology service space, are now trading at a huge premium to some of the bellwether, the larger IT stocks. So, one has to be very careful of adding fresh positions or fresh names,” Shah said, in an interview to CNBC-TV18.

Also Read: Amid fintech offerings in lending space, are merchants' savings taking a hit?

According to him, the demand environment for tech companies is very strong. “However, the parameter to watch out for is margins. If you look at it, over the last four quarters or so, margins have been at record highs and it's unlikely that margins are going to sustain at these kinds of levels. And so, if a bit of slippage on margins happen, you could actually see a sharp correction in the stock prices of that, some kind of alignment of PE multiples where some of these stocks fall in line with the valuations of some of the largecap peers. So, this is a time to turn a little cautious on the technology services sector,” he said.

Also Read: Morgan Stanley selective on midcap IT; overweight on Mphasis, Mindtree; here’s why

He further said that sectors like specialty chemicals continue to be strong. However, he does not see alpha generation in universal banks. “I don't see massive scope for alpha generation in the universal banks because they are most vulnerable and with the kind of margins and spreads that they have enjoyed is in a way, now getting threatened with fintech, specialized lenders coming in etc., with abundant liquidity,” Shah said.

For more, watch the video

(Edited by : Dipika Ghosh)