Information technology: A mixed bag for Indian IT services
While India’s IT services companies continued to struggle for growth in the December quarter, the silver lining was the fact that mid-sized companies grew at a better pace
India’s large information technology (IT) services companies continued to struggle for growth in the December 2017 quarter. Year-on-year growth in revenue fell marginally to 6.4% in constant currency terms, according to data collated by Nomura Research. This includes the performance of Tata Consultancy Services Ltd, Infosys Ltd, Wipro Ltd and HCL Technologies Ltd. Growth in the key US region and the banking and financial services vertical remained sluggish.
The silver lining in the past quarter’s results was the fact that mid-sized companies grew at a better pace. “Midcap companies motored ahead with 3.7-8.3% sequential growth, powered by a ramp-up of large deals,” analysts at Kotak Institutional Equities wrote in a note to clients.
Sequential growth at large-sized companies ranged between 0-1.7%, after adjusting for contributions from acquisitions, according to Kotak’s calculations.
Mid-sized IT companies are benefiting from the disaggregation of deals to smaller sizes and revamp in their managements, the broker adds. To be sure, even ownership has changed at a number of these firms, which also seems to be helping.
Of course, these companies are relatively small to make a meaningful impact on overall industry growth. As such, industry growth is expected to remain in the single-digits in the coming year, although some mid-sized firms such as Mindtree Ltd and L&T Infotech Ltd are expected to outpace peers.
The trend in profit margins was similar, with large-sized firms struggling to maintain margins, while some mid-sized companies grew margins meaningfully.
IT stocks, meanwhile, seem to be pricing in a nearly uniform recovery in growth for all IT companies in FY19.
As Kotak’s analysts point out, it makes sense for investors to pick and choose. “Our recommendation bias is towards companies that have low implied growth acceleration baked into stock prices,” they wrote in a 21 February note to clients.
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