Mid-sized IT companies’ results signal US recovery – The Times of India on Mobile
BANGALORE/MUMBAI: Mid-sized software services companies, most of which reported in-line or better-than-expected performance in June quarter, see increased sales from the US during the second half of this year as economy improves and caution over technology spending eases.
Companies including Mindtree, Hexaware, Syntel and KPIT Cummins said they expect discretionary spending on technology by corporations to improve significantly compared to the year-ago period. Further, better economic data from the US, which contributes over 60% of the IT sector’s revenue, has instilled confidence in their client firms to outsource more work.
Over the past two years, most mid-cap firms have managed to outperform their larger peers such Infosys, Wipro etc due to their expertise in select verticals such as insurance, capital markets, transport and aviation. Analysts said this trend is likely to continue over the next few quarters. Discretionary spending, typically seen as an indicator of the technology services industry’s growth, has been a cause of concern till recently as corporations in the US and Europe cut down on it, in a bid to trim costs.
“The results so far in the mid-cap IT space have been very encouraging, particularly with respect to discretionary spending. The mid-cap valuations are quite attractive, and with discretionary spending picking up, the forthcoming results could be even better,” said Mrinal Singh, senior fund manager at Mumbai-based ICICI Prudential AMC. The over 100-crore fund hold shares in Mindtree, Persistent Systems, Infotech Enterprises, among others.
Exposure to highly specialised technology areas, that are considered unattractive or not scalable by the larger companies, has also aided these smaller IT services companies during the recent quarters.
“Mid-cap stocks, that we like, all have niches that they specialise in, which has helped them do well. They all have exposure to discretionary spending in those niches,” Hitesh Shah, director at brokerage firm IDFC Securities told ET Shah, who prefers shares of KPIT, Hexaware and Persistent Systems, said discretionary spending has not recovered completely, but he expects it to improve in the coming year.
Bullish commentary from mid-cap IT firms reinforce improving demand outlook in the Indian IT industry, which software industry body Nasscom expects to grow 12-14% during this fiscal year. Bangalore based Mindtree, that reported a 4% revenue growth above street estimates, said it expects to see similar sales momentum in the next quarter, while Mumbai based Hexaware Technologies guided for a 3.5-5.5% sequential revenue growth in the third quarter.
“Our deal pipeline is healthy, as the US economy picks up. We are chasing four large deals that would help us meet guidance,” Hexaware Chairman Atul Nishar told ET. The company, which has three centres in the US, is planning to open a fourth next month.
Prashant Ranade, chief executive officer of Syntel, which reported a 7% revenue growth, said the company saw a strong order pipeline aided by client additions in all business lines. “While corporations are being careful with discretionary spending, we expect it to be stable or even increase slightly going forward” Ranade said.
The improved sentiment from mid-sized firms is coming at a time when India’s second largest technology outsourcer Infosys expects discretionary spending from clients to remain under stress.
“Mid-caps were major beneficiaries of rupee fall. This, coupled with deal wins and a decent pipeline led to fairly strong margin growth. In general, mid-caps earnings came in better than Infosys numbers but weaker than TCS,” said Hardik Shah, research analyst at brokerage firm KR Choksey.
Pune-based KPIT Cummins said its top-10 accounts grew 20% during the quarter.
Warm Regards / Ganesh Srinivasan
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