Mid-tier IT caught between shrinking deals and rising costs

Pune | Mumbai: India’s mid-cap IT firms have posted their worst set of numbers in the past few years in the just concluded quarter, following cuts in client budgets, deferred projects and rising costs of local talent in the US and Europe.The slowdown in spending on banking, financial services and insurance (BFSI) has emerged as a key concern, industry insiders said, even as they remain wary of a spillover effect into other verticals.Margins at Mindtree, which has changed owners, dropped to their lowest in eight years in the June quarter, while growth has been largely flat at L&T Infotech. Persistent Systems reported a 3% drop in dollar revenue, while Cyient posted its worst quarterly numbers in a decade.The first quarter (April-June) typically tends to be soft for tech firms, analysts tracking the sector said. “There are higher expenses because of H-1B filing costs and wage hikes in this quarter, but this time, the appreciation of the rupee has also hurt the tech firms,” said Harit Shah, senior analyst, Reliance Securities.While margin pressures may ease in the second quarter, it will take longer for revenue to recover, he said. The BFSI sector in the US is facing a slowdown, impacting even large-cap companies. “While BFSI is a larger set that includes wealth management, capital markets, insurance, consumer banking and so on, there are certain areas within that seeing a slowdown — call it insourcing, lower tech spend by some of these larger banks,” said Apurva Prasad, IT analyst at HDFC Securities. “BFSI is apain point that seems to be emerging.” L&T Infotech’s quarter-on-quarter revenue growth in constant currency terms was 1%, its weakest in the past nine quarters, according to analysts.This was due to weakness in its top banking client and another lender in Africa, they said. “For L&T Infotech, within BFSI there were two clients affected and they called it earlier too. But the real concern across the space is if this macro slowdown can percolate into other accounts and verticals,” said Prasad.Firms have been hit by unforeseen situations. Cyient was hit by a slowdown in two key verticals — aerospace, and defence and communications. The company will have to overcome issues in its top 20 clients to achieve significant revenue growth, analysts said.L&T Technology Services was also impacted by a ramp-down in spending by one of its top clients. Revenue at a key vertical — telecom and high-technology – declined $7 million quarter-on-quarter, HDFC Securities said. Analysts are, however, confident that the company will be able to revive profit margins in the coming quarters due to its varied business mix and strong growth in its transportation vertical. Business at Mindtree, which analysts believe is fundamentally strong, is likely to be hit till there is certainty around senior leadership following its acquisition by Larsen and Toubro. Its new CEO is expected to come on board on August 2.Kotak Institutional Equities said the company can grow revenue if attrition rates are contained. S N Subrahmanyan, a director at Mindtree and chief executive of L&T, however, told analysts in a recent call that he expects deferred deals to return and is confident of a stable second quarter.Mphasis, however, was able to buck the trend, owing to increased growth from its digital business. The company secured $151million worth deals in its direct international business, of which 80% was in new-generation services, the company said.70425997

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