Midcap IT stocks tank: Here's why Persistent Systems, Coforge shares fell up to 9%

Shares of midcap IT service providers Persistent Systems Ltd. and Coforge Ltd. fell as much as 9% on Thursday, July 24, in response to the quarterly results that both companies reported after market hours on Wednesday.

While shares of Persistent Systems are down 8.8%, which is the biggest single day fall since April 3 this year, Coforge shares are down 7.7%, which is their biggest single day fall since April 4 this year.

On the growth front, Coforge delivered a 8% constant currency number, which was higher than the CNBC-TV18 expectation, which was between 6.5% to 7.5%. Persistent Systems however, reported a 3.3% constant currency revenue growth, which was lower than the CNBC-TV18 poll estimate of 3.8%.

Coforge reported EBIT margins of 13.2% during the June quarter, which was the same as last year, but analysts had expected them to expand sequentially. However, in an interaction with CNBC-TV18, the management of Cofore upheld their full-year margin guidance of 14%.

Adjusting for one-offs, Coforge reported an EBIT margin of 12.7%, which is not only below expectations, but also a contraction from the previous quarter.

Additionally, the company had negative free cash flow during the quarter and also spent $85 million in capex, of which, $62 million was used to set up an AI data centre. This made the business asset heavy from an asset light one earlier.

Apart from missing growth expectations, Persistent Systems also deferred wage hikes by one quarter. Deal wins also are not expanding, as they remained flat at $520 million, compared to $517.5 million in the last quarter.

Brokerage firm Bernstein has maintained its "outperform" recommendation on Persistent Systems with a price target of ₹6,300 per share. It said that the stock could see some correction in the near-term considering its premium valuations.

Nomura retained its "neutral" rating on Persistent with a price target of ₹5,510, while cutting it financial year 2026 and 2027 earnings estimates by 3%. It retained its "neutral" rating citing rich valuations on the stock.

Out of the 42 analysts that cover the stock, 20 of them have a "buy" rating, nine say "hold", while 11 have a "sell" rating.

For Coforge, 27 out of the 38 analysts that cover the stock have a "buy" rating, four say "hold", while seven of them have a "sell" rating.

Shares of Persistent Systems are trading 8.8% lower at ₹5,114, while those of Coforge are down 7.8% at ₹1,706.