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Mid-tier infotech companies on white-hot ride

Tuesday, 20 November 2012 - 6:00am IST | Place: Mumbai | Agency: dna
Narrowing IT margins among tier-1 cos and continuing fragmentation of deals mean mid-tier companies will continue to outperform for at least the next year and a half, experts said.

The Street believes the underperformers of Coder Avenue such as Infosys and Wipro are turning it on while outperformers such as TCS and HCL Technologies would lag in the fourth quarter ending December 31. What gives?

Vimal Gohil, analyst with Asit C Mehta Investments Intermediates, explains: “In the case of Infy, the next two quarters will see revenues come in from the Lodestone acquisition.  Besides, in order to meet its predicted 5% annual guidance, Infy needs minimum revenue
growth of 3-3.5% for the next two quarters.”

And in the case of Wipro, he said, decision-making is expected to buck up from newly added clients after the new US fiscal plan to be released after February 2013. “However, fiscal growth will be slow, so Wipro’s growth is not expected to pick up before the second half of next fiscal.”

While Infy and Wipro have predicted Q4 growth to be in the range of 3-4% and 2-4%, respectively, TCS and HCL have forecast a flat run.

Speaking on condition of anonymity, another analyst said management rejig and improvement in top 10 client mining could also be the reasons why Infy and Wipro have given better guidance.

“HCL’s re-bid market strategy could lead to slower revenues in Q4, since the ERP service line is completely discretionary in nature," said Gohil. "Since it will be the beginning of the year, discretionary spending will be soft, the same reason why Cognizant has predicted slower growth in the second half of next calendar. In the case of TCS, Q4 growth is expected to be on similar lines as Q2, due to the base effect of achieving over 5% volume growth in the last two quarters.”

However, analysts Viju K George and Amit Sharma from JP Morgan suggest that stability in the macro environment may lead to faster decisions on discretionary spends and larger deal pick-up.

“Conservatively assuming no market share gains by offshore firms in 2013 [vs 2012] in
the large, legacy contracts segment, this would mean that the value of renewal deals signed by Indian players in 2013 should be at least up by 20% [from 2012],” they said in a note.

Narrowing IT margins among tier-1 cos and continuing fragmentation of deals mean mid-tier companies will continue to outperform for at least the next year and a half, experts said.

“By not replicating what large companies are doing, break-down of large deals into smaller sizes, recruitment of managerial talent from large companies, and absorption of rupee depreciation benefits upfront compared with Tier 1 peers which have invested in deals involving heavy upfront transition costs, are reasons for mid-tier companies outperformance,” said Kawaljeet Saluja, Rohit Chordia and Shyam M, analysts with Kotak Institutional Equities, in a note on Friday.

The trio also said this fiscal could be the first year when Tier-1 IT firms would barely grow in line with Nasscom’s industry revenue growth guidance of 11-14%, albeit at the lower end, due to increasing fragmentation — with 3-4 players expanding to 7-8 players in the last
3 years.




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