Three Things That Hurt Mid-Sized IT Firms In First Quarter
Tightening IT spends were apparent through the quarter and little visibility on when will it return, Axis Capital says.
Revenue and margins contracted for mid-sized software services providers in the first quarter as clients deferred new deals, the rupee strengthened and the companies paid more for visas to send engineers on-site.
Aggregate revenue in rupee terms for seven IT companies— with a market capitalisation of at least Rs 4,000 to 30,000 crore each—declined 1 percent quarter-on-quarter in the three months ended June. These include L&T Infotech Ltd., Mphasis Ltd. and Mindtree Ltd.
Hexaware Technologies Ltd. and Zensar Technologies Ltd. are yet to report earnings.
Tightening IT spends were apparent through the quarter and there is little visibility that these will to return to earlier levels, according to Axis Capital.
- Number of new deals declined 1 percent sequentially for Mindtree as clients wait for appointment of new leadership and strategy following the company’s takeover by Larsen & Toubro Ltd.
- Cyient saw a sharp 28 percent sequential decline in order intake because clients delayed decisions.
- L&T Infotech’s revenue remained flat after it completed a project in the manufacturing vertical and a ramp-down by a top client, according to a report by Emkay Global.
- NIIT Technologies attributed weakness in the quarter to budget cuts from one of its top five clients.
- Mphasis registered growth but the revenue was below expectation. Nomura attributed it to slackness in its direct channel which involves business beyond Hewlett-Packard and DXC Technology.
- Persistent Systems acknowledged to ‘lumpiness’ or irregular revenue through the year.
Operating margins contracted on account of higher visa costs and a strong rupee against the U.S dollar. Since all companies get a majority of their revenues in dollars, appreciation in the currency means they get less for every dollar, hurting operating margins.
- Mphasis was an exception since it fully hedges its exposure to currency and sees no impact of forex volatility.
- Hike in salaries by NIIT Technologies and Cyient’s lower utilisation of workforce impacted operating margin.
Way Forward
Mid-sized IT companies remain vulnerable to moderation in growth and margin pressures from offshore hiring and high attrition, according to Emkay Global. Prabhudas Liladher said growth in digital services, which has seen a sharp uptick, may be a little more gradual now.
Shares of mid-cap IT companies have declined 9 to 37 percent this year—the only exception being NIIT Technologies that rose 11 percent. That compares with a decline of 8.59 percent in the Nifty Midcap 100 Index.
But average of analyst estimates tracked by Bloomberg suggest an upside of 13-29 percent in the next 12 months.