Mid-level IT cos may buck global recession
Small deal sizes, pricing flexibility to provide cushion; However, client concentration risk can’t be ruled out
Mid-tier IT companies are outperforming their large counterparts for last one-and-a-half-years in terms of revenue growth
Bengaluru: Impact of an impending slowdown in the global economy may not be different for mid-tier IT services firms as compared to their bigger peers. Industry experts said that smaller contracts and pricing flexibility put mid-tier firms in good stead despite low chances of bagging large cost takeout deals.
"The impact should be uniform across the board (for both large and mid-tier IT firms). What may be interesting for mid-tier firms is the intense competition from large sized providers for their home turf or strong areas in terms of service delivery as contracts go smaller and for quick returns," Global IT research firm ISG's principal analyst, Mrinal Rai told Bizz Buzz.
Mid-tier IT companies are outperforming their large counterparts for last one-and-a-half-years in terms of revenue growth. In the second quarter ended September, Mindtree (now LTIMindtree) posted a sequential revenue growth of 7.2 per cent in constant currency term. Similarly, while Coforge reported a revenue growth of 6.2 per cent quarter-on-quarter, it was 6.6 per cent for Persistent Systems. L&T Technology Services posted a revenue growth of 4.5 per cent in sequential term in Q2 of FY23.
Most of the mid-tier IT firms have guided for double-digit revenue growth for this fiscal year. Brokerage firms are of the opinion that Accenture's recent performance indicates a slowdown in demand, which may lead to large cost takeout deals coming to the market. Usually, large companies benefit from such a trend.
"Client focus is shifting towards large cost-transformation deals, which may benefit large Indian IT services companies with strong capabilities and experience in cost-takeout deals," ICICI Securities wrote in a note.
It, however, noted that impact of recession is likely to be less as both clients and IT firms are planning to face it for quite some time now.
"Effects on mid-tier firms are similar (to large IT firms) but they might have some protection due to smaller client sizes. Where mid-tiers have a significant client concentration (one or two very large clients that are slowing down), then they too will be affected," said Siddharth Pai, an IT outsourcing advisor and founder of venture capital firm Siana Capital Management.
Meanwhile, sensing a slowdown in demand, IT stocks in Indian bourses have seen selling pressure building up in the last few days. Nasdaq, where most US technology giants are listed, is also under intense selling pressure.
The impact should be uniform across the board for both large and mid-tier IT firms. What may be interesting for mid-tier firms is the intense competition from large sized providers for their home turf or strong areas in terms of service delivery as contracts go smaller and for quick returns
-- Mrinal Rai, principal analyst at ISG
Effects on mid-tier firms are similar to large IT firms, but they might have some protection due to smaller client sizes. Where mid-tiers have a significant client concentration (one or two very large clients that are slowing down), then they too will be affected
-- Siddharth Pai, founder, Siana Capital Management
