Mid-tier companies are sharpening their overall strategy, by increasing focus on certain markets and businesses than spread thin.
Pune: Revenue growth at mid-tier IT services firms such as Hexaware, Zensar, Mphasis and L&T Infotech is set to pick up, boosted by strong deal wins as they see customers keen to invest more in technology projects. While they are projected to outpace large rivals such as Infosys and Wipro in growth, the pressure on their margins is likely to be higher, said analysts.
“We have a strong deal pipeline with one $50-million win and two Fortune 500 clients. Digital, which is currently 37% of the business, has grown 33% year-on-year,” L&T Infotech CEO Sanjay Jalona said.
While addressing investors recently, Keshab Panda, CEO of another L&T group firm, L&T Technology Services, said barring concerns around one account, its business was geared to grow in the high-teens for the next year. The company has a large deal pipeline, including some that are in the final stages of discussion, he added.
Hexaware reported its first client win of over $100 million in the December quarter. “It was a solid quarter from a booking perspective and we are confident of a robust 2019,” CEO R Srikrishna said.
The company expects organic revenue growth in the year through December 2019 at12-14%, with a big part of it happening in the later part of the year as a result of Q4 deal ramp ups. RPG Group IT firm Zensar said its deal pipeline had crossed $1 billion for the first time.
Digital, which now forms over 44% of the total revenue for the company, is growing at 35.9%.
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These companies, with a smaller revenue base, are growing faster than their larger rivals. For instance, Infosys recently forecast revenue growth of 8.5-9% for fiscal 2018-19 in constant currency terms, compared with 5.8% last year. Most of the midsize firms are on track to grow at 10-18% on the back of strong expansion across both traditional and digital business. Some, like L&T Technology Services, have been growing at over 36% on a quarterly basis and are expected to continue to outgrow the sector by a significant margin. They have also been hiring steadily, in India and outside. “All indicators show that these mid-tier IT service firms will again grow better than industry average in FY2020. Their pipeline is better than last year. They are growing both existing accounts and getting new logos and deals especially in the last quarter,” said Pareekh Jain, founder of Pareekh Consulting. “It is broad-based growth, across geographies, verticals and service lines, unlike their large peers where we see softness in a few geographies and verticals.”
Mid-tier companies are sharpening their overall strategy, by increasing focus on certain markets and businesses than spread thin. Zensar recently sold its Apac business in order to focus on high-value geographies. CEO Sandeep Kishore said the company had added about 1,200 people in the last 12 months and was increasing its onsite headcount.
Mphasis is looking at driving double-digit growth from shareholder Blackstone’s portfolio companies from the current 5%. L&T Infotech acquired Ruletronics, a boutique consulting firm that will help it grow the digital business at a faster pace.
While these firms are growing fast, their margins continue to be under pressure. “Margins are declining for almost all mid-tier IT service firms,” said Jain. “The pricing pressure in the traditional segment can erode their margins further. On top of that, these mid-tiers are facing same margin headwinds as their large counterparts, local hiring, restricted people movement.”
