Home >Industry >Infotech >Mid-cap IT companies fare better than large peers in Q4

MUMBAI: Small and mid-cap IT companies have posted better results in the March quarter compared with the top five names in the industry -- Infosys, Tata Consultancy Services, Wipro, Tech Mahindra and HCL Technologies.

Earnings data cited by analysts indicated that mid-cap companies have performed better as they managed supply-side constraints, pricing and payment better than their larger peers.

According to Mint analysis of 24 technology companies that have announced earnings so far, net sales grew at 7%, a sharp decline from 18.42% in same quarter last year. Adjusted net profit growth (after one time loss or profit) was at 1.11% in Q4 from 16.38% in March quarter last fiscal.

However, tier II technology companies have delivered a relatively better performance than tier 1 in general in March quarter, said Emkay Global Financial Services in a report.

The brokerage firm said the numbers were relatively better because Q4 was not fully impacted by the lockdown-related supply side challenges which started to emerge around second half of the month of March. "In addition, these companies have a higher share of onshore delivery as compared to tier I techs. Thereby, given the relative ease of work-from-home in onshore locations, the companies would have got impacted much lesser due to the supply side issues," it said.

Hexaware, MindTree and NIIT Technologies have high exposure to travel and hospitality verticals and may suffer in the near term, Emkay added.

Data provided by Capitaline showed that net sales growth of nine midcap IT companies was at 11.88% from 20.97% a year ago, while adjusted net profit growth was at 10.97% from 18.63% in same quarter last fiscal. In contrast, the top five IT companies saw a sharper decline both in net sales and adjusted net sales. For the top five IT companies, net sales growth and adjusted net profit was at 7.61% and 1.67% from 16.77% and 15.82% in year-ago period respectively.

Sanjeev Hota, Head of Research, Sharekhan by BNP Paribas said,“Mid-cap companies have performed better than top tier-1 companies as these mid-cap companies have managed supply-side constraints well despite covid-19-led business disruption in the last two weeks of March."

The disruption among most of mid-tier companies is lower than initial expectation because the full impact of stress for their exposure to troubled verticals are not felt yet. Also, mid-cap companies like Larsen and Toubro Infoctech , Persistent, etc have limited exposure to the troubled verticals, he said.

Hota expects significant decline in growth during first quarter of FY21 owing to material deterioration of demand environment during second half of the fiscal, project deferrals, delay in ramp-up of deals and deal closures, reduction in discretionary spends and request for concession in billing rates.

Analysts, however, warn that the upcoming quarters will be difficult for the entire IT sector as covid-19 led disruption will erode revenue and business growth.

“The full impact on verticals like travel and tourism will be felt now because in the previous quarter they were still taking precautionary measures but the business impact happened in April. Budget calls will only follow these impacts. Midcaps operate on a smaller revenue base so it takes lesser time for them to recover from a hit,"said Madhu Babu, IT analyst at Centrum, a Mumbai based broking and research firm.

IT spends by banks may be impacted in the near term, dragged down by decline in discretionary spending. Pricing pressure on run spends and extensions on payment terms are other key concerns. While the first-order impact due to covid-19 may be limited, side-effects such as interest rate cuts globally, capital market volatility, and potential bankruptcies in debt-heavy sectors could translate into a second-order impact, analysts said.

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