Small deals help mid-tier IT cos shrug off slowdown

Strong deal pipeline also provides a level of comfort to revenue growth trajectory. Mphasis won $401 mn of net new deals in Q3 of FY23, the second highest ever for the mid-tier IT firms

Bengaluru: Mid-tier IT firms like Coforge, Persistent Systems, KPIT Technologies & Mphasis are likely to sustain their revenue growth trajectories in coming quarters on the back of strong deal pipeline in the third quarter of current financial year. Industry experts are of the opinion that despite growth moderation, these tier-II IT companies might not face much slowdown given their strong execution capabilities and focus verticals.

“When it comes to the accomplished mid-tier players, their business model is their biggest shield against recession. Most of their client engagements are short-duration, project-based, and sub-$20 million in value, along with clients reaping instant benefits. Hence, they continue to post strong numbers,” Ashish Chaturvedi, Practice Leader, HFS Research told Bizz Buzz.

Strong deal pipeline also provides a level of comfort to revenue growth trajectory. Mphasis won $401 million of net new deals in Q3 of FY23, the second highest ever for the mid-tier IT firms. It was 33 per cent higher than the second quarter which stood at $302 million. Similarly, Persistent Systems’ deal win stood at $440 million in third quarter, 20 per cent higher than the contracts bagged in the second quarter.

Coforge bagged contracts worth $345 million during this period, up 13 per cent from the previous quarter. Similarly, KPIT Technologies won deals worth $272 million in Q3 of ongoing financial year as compared to $148 million won in the second quarter. A strong deal pipeline with multi-year partnerships is important now, as deals could dry up later in an uncertain economy. A strong deal pipeline also means predictability in hiring and higher employee utilization levels, supplementing operating margins.

“Management changes in some of the mid-tier firms are also helping these companies sustain growth owing to changes in strategies. Changes in management and/or ownership across tier-II triggered substantial overhaul around sales engines, strategy & payouts, driving improved performance on multiple fronts. We believe these changes have created much needed agility in tier-II companies,” Institutional equities platform DAM Capital wrote in a report. Meanwhile, companies like Persistent & Coforge with $1 billion annual revenue run rate are now better-placed to participate in large outsourcing deals. Falling attrition in Q3 also augurs well. Coforge’s attrition fell 60 basis points to 15.8 per cent in quarter ended December, while Persistent Systems’ fell over 210 basis points to touch a multi-quarter low of 21.6 per cent. However, industry veterans also pointed out that tier-II firms face client-specific risks which may derail their growth prospects. “When growth moderates, all IT firms will witness slow growth. All companies will see low growth this year (as compared to previous one). Though mid-tier firms have done well, client-specific issues can pull their growth rate down as they draw more business from a few clients,” V Balakrishnan, Chairman, Exfinity Ventures & former CFO of Infosys told Bizz Buzz.

When growth moderates, all IT firms will witness slow growth. All companies will see low growth this year. Though mid-tier firms have done well, client-specific issues can pull their growth rate down

- V Balakrishnan, Chairman, Exfinity Ventures & former CFO of Infosys, tells Bizz Buzz

When it comes to the accomplished mid-tier players, their business model is their biggest shield against recession. Most of their client engagements are short-duration, project-based, and sub-$20 million in value, along with clients reaping instant benefits.

- Ashish Chaturvedi, Practice Leader, HFS Research