Digital exposure to help midsize IT companies post higher growth

BENGALURU: Midsize Indian IT services companies may post steady growth on the back of higher digital technology exposure, especially at a time when large companies are projected to have cautious forecast, said analysts.

While some of the mid-cap IT firms have registered strong growth in the past couple of quarters, analysts have said they would continue to see higher revenue growth fuelled by digital deals.

Mid-size companies in the engineering and R&D space are likely to continue to post higher growth.


“Higher digital (technology) exposure and less legacy (software maintenance, technology infrastructure management) services compared with the larger companies are really translating into higher growth,” said Apurva Prasad, IT analyst, HDFC Securities. Companies such as Mindtree, Zensar garner more than one-third of their revenue from digital technology services.

Another key growth driver for these companies is the client metric.

Prasad said, while the large clients for the mid-cap IT companies are growing faster, large accounts or deals for bigger IT companies have seen enough technology disruption and many of them re-oriented technology spending to drive internal innovation.

“Large contracts for large companies are worth nearly $100-200 million unlike the large deals for mid-cap firms that are valued at $25-30 million.”

“Mid-tier companies will report 2-3% constant currency revenue growth sequentially despite seasonal weakness. Growth will be buoyed with share gains in existing large clients and benefits of large deals signed in the past 6-9 months,” Kawaljeet Saluja, analyst with brokerage Kotak Institutional Equities, said in a report.

Companies such as Mindtree, NIIT Tech, Zensar and others are likely to see continued growth momentum with the exception of Persistent Systems, which had warned that a shortfall in intellectual property (IP) revenue would affect its growth and margins in the fourth quarter.

Brokerage Edelweiss Securities had noted that while a drop in IP revenue was expected because of seasonal weakness in IBM’s Alliance business, the $8-million miss is much higher than anticipated due to revenue ramp-down in one of its IP products. “Growth recovery in Mindtree (4.4% QoQ reported) and NITEC (3.4%) should continue; we expect a 4.4% QoQ decline for Persistent Systems post the recent business update citing a shortfall in IP revenues,” wrote Pankaj Kapoor and Akash Verma of JM Financial.

“The momentum is likely to remain strong in the ER&D space; we estimate organic US-dollar revenue growth of 2.3% and 6.9% for L&T Technology Services and Cyient,” Kapoor and Verma said. Shares of Mindtree, Zensar and Hexaware have risen over 20% in value over the past three months, in step with the overall rise in midcap stocks.

Analysts had said that the outlook for smaller, under-scale companies are bleak and said consolidation was the only cure. Since then, some of the companies have brought in PE backers — Zensar and Hexaware — or merged with others to create specialisation, as with KPIT and BirlaSoft.