The recovery in information technology (IT) outsourcing seems to be reflected only in the results of the top three firms in the industry—Tata Consultancy Services Ltd, Infosys Technologies Ltd and Wipro Ltd. Revenue was either flat or fell for most other IT firms, even while they rose by 3% sequentially in rupee terms for the top three firms. Among large firms, HCL Technologies Ltd reported flat revenue growth, though it must be noted that the company had outdone its peers in the preceding two quarters and so had the disadvantage of a high base.
Almost all midsize companies reported flat revenue growth. Tech Mahindra Ltd’s revenue fell 9% after adjusting for certain restructuring fees it received from its top client. MindTree Ltd’s organic revenue fell by 1.7%. Polaris Software Lab Ltd and Infotech Enterprises Ltd saw flat revenues, while NIIT Technologies Ltd reported a 1.7% increase in revenue. Cumulatively, their revenue fell by 4.6%, dragged down by the large fall in Tech Mahindra’s organic revenue. Excluding Tech Mahindra, cumulative revenue of the four midsize firms was flat. According to an analyst with a domestic institutional brokerage, the top firms have gained from the integration work in the banking and financial services industry (BFSI). Midsize firms aren’t handed integration work related to large mergers and acquisitions. Another driver of growth in BFSI has been work related to risk management and regulation, which again is unlikely to come the way of midsize firms. Besides, in their efforts to cut costs after the financial crisis, companies across sectors have moved to consolidate their vendor base. In this process, midsize vendors tend to lose out.
Graphics: Yogesh Kumar / Mint
But it’s not a gloom and doom scenario for midsize firms. They, too, are expected to return to growth, albeit with a lag. Most of these companies have resumed hiring, after a lull of over a year. The five midsize companies mentioned above increased their employee base by 7.6% compared to the September quarter. This is higher than the 5.1% rise in the employee base of the top three firms.
Still, investors seem to be waiting for the recovery to get reflected in the results of these companies. The cumulative market cap of the five midsize firms has fallen by at least 5% since the results season began. The cumulative market cap of the top three firms, in comparison, is up around 2%.
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