Mid-tier IT companies seem to be coming back to life, with their revenues growing at a much faster pace than the top software players in the nine months ended December 2011.
So, TCS, HCL Technologies and Infosys have been growing revenues at 17-33 per cent in each of the three quarters of this fiscal compared to FY11, Polaris, MindTree, Persistent Systems and KPIT Cummins have logged much higher rates of 22-49 per cent.
BFSI, manufacturing
lead the way
Revival in the key verticals that they operate, the return of large multi-year contracts and sustained momentum in outsourcing by their US customers have all aided revenue growth for mid-tier IT companies. Analysis cover mid-tier IT companies with revenues ranging from Rs 800 crore to Rs 2,200 crore.
The very geographies and verticals that were expected to undermine the prospects for mid-tier IT players have actually helped them deliver growth in the past year.
For one, most mid-tier players are dependent on the US market and derive 70-80 percent of their revenues from there, even as top tier players have tried to diversify to other regions.
With the US economy actually on the mend while Europe has been hit by sovereign debt troubles, revenues for the mid-tier IT players have held steady in the past year. They have been largely immune from the vagaries in outsourcing from debt-burdened and slowing European countries.
Then, most mid-tier IT companies also derive their entire revenues from the banking, financial services (BFSI) manufacturing and automotive verticals. In contrast, for top-tier software players segments outside BFSI now account for 60-70 per cent of revenues.
The BFSI segment and other targeted by mid-rung companies have seen a robust revival in outsourcing. Except telecom, customers in most other segments such as BFSI, retail, automotive, manufacturing and healthcare have increased outsourcing over the past couple of years.
Cost-cutting initiatives following the financial crisis have prompted companies in financial services, autos and retail to outsource more. While top IT firms were the first to latch on to fresh outsourcing, mid-tiers have managed to tap into the second wave of such deals.
Deal flows healthy
Helped by above trends, several mid-tier software companies seem to be going up the execution value-chain. This is evident from the larger sizes of deals that they have won in the past 12-18 months.
Hexaware, Polaris, MindTree and KPIT Cummins have all signed deals ranging from $20-100 million, spanning three-five year periods.
Hexaware has gone a step further and managed to bag a $250 million contract in November 2011. KPIT Cummins also benefitted by taking a 50 percent stake in SYSTIME - a JD Edwards(an ERP product from the Oracle stable) solutions provider, in May last year, which allowed it to win large-size deals.
This drastic increase in run-rate is an indication of customers increased confidence in them, especially as it would be more economical than going for larger IT vendors.
There were concerns earlier in 2009 on whether smaller IT players would be out of game with clients opting for vendor rationalisation. Mid-tier players have withstood this process too and seem to have come out triumphant.
As observed by Mr Sid Pai of TPI in a conversation with Business Line a few months ago, the rationalisation process affected only the really small speciality vendors. He said that mid-tier players would very much continue to survive and thrive.
Net profits too grow
The concerns on profits stagnating too seems to be fading as mid-tier companies seem to have weathered multiple concerns such as increased tax outflow and forex losses.
These software companies saw their tax incidence increase from 9-14 per cent in 2009-10 to 20-25 per cent currently, as tax incentives on STPIs expired. But underlying momentum in revenues on the relatively low base, has helped them absorb the increase, with net profits too growing at a healthy pace.
In terms of hedging their currency exposures, earlier a major concern, mid-size players have become cautious and have started taking shorter term hedges, rather than taking long-term currency calls and incurring losses.