September quarter not cheery for most mid-size IT companies

Barring hi-tech, media and BFS, all other segments demonstrated strong growth for it

Mid- cap information technology (IT) services companies have largely underperformed in the July-September quarter.

Except for L &T Infotech (LTI), they have been invariably unable to keep up on growth. Slower growth in the key banking and financial services (BFS) segment, and client-specific issues, are major reasons.

“We would strictly advise against investing in mid-caps in Indian IT at this point. We see greater revenue and margin volatility in a likely nogrowth scenario for the industry in FY21,” went a note from Girish Pai, head of research at equity research firm Nirmal Bang.

LTI did have client-specific issues but reported a strong quarter. Largely contributed by broad-based growth across verticals and steady deal ramp -ups. Barring hi-tech, media and BFS, all other segments demonstrated strong growth for it. The L &T group company also expects its BFS business to do well in coming quarters.

“We believe the receding of client-specific challenges, coupled with momentum in deal pipeline, is expected to lead to H2 (the second half of this financial year) being better as compared to the first half. Additionally, ramp-ups of recently won large deals provides the base for revenue growth acceleration in FY21,” said Devang Bhatt, research analyst at ICICI Securities, in a note on the performance.

Even Mindtree, despite the uncertainty it faced in the past quarter due to a management shuffle, reported recovery in the BFSI (banking , financial services and insurance) segment.

The Bengaluru-based company reported stable pricing, though deal ramp -ups look slower. There was stronger operational efficiency, in terms of reduced staff cost, lower subcontractor cost and increased automation.

Another company that did well in BFSI was NIIT Technologies.

In the September quarter, it saw the insurance segment growing 15.3 per cent over the June one in constant currency ( CC) terms, while banking and financial services grew 9.4 percent. Strong sequential growth in verticals was also due to a $6 -million revenue contribution from the acquisition of Wishworks.

On the other hand, performance of some other mid-sized companies such as Zensar, Hexaware and Cyient disappointed the market. Hexaware again reduced its forecast for this calendar year, to 17-18 per cent (from the earlier 19 per cent). Key factors include likely client furloughs in the next quarter, apart from anticipated reduction in revenue from top BFS clients and adverse foreign exchange impact.

“We had a few client-specific issues, which caused a two per cent drop in revenues in the quarter, and expect a further hit from this. Some pockets within BFS are growing normally but there is cautiousness around spending. NON-BFS verticals are doing exceedingly well,” said R Srikrishna, chief executive at Hexaware. “Participation in deals across the board has continued to increase at a good pace.”

Engineering services firm Cyient is also seen struggling with issues in its core aerospace and communication verticals.

Slower ramp-up of deals signed in previous quarters was another issue for the companies. Zensar reported lower than expected financial numbers. In CC terms, sequential revenue growth for the Punebased entity was only 0.3 per cent, lower than analyst estimates, due to slower ramp-up of news deals.