IT Midcaps Q2: Skill shortage and client woes dragged digital growth

But strong demand environment keeps up hiring

Supply chain issues, higher attrition and client furloughs kept IT Midcaps on their toes in Q2 FY18 despite good deal momentum. While on the hiring front the September quarter has seen good numbers both from large caps and midcaps, the
midcaps have all consistently spoken about how the rush for digital share is straining human resources driving up employee and subcontracting expenses and impacted digital growth.  

The likes of Persistent Systems and Hexaware posted below estimate revenues due to multiple client issues and foreclosure of projects. Despite these hiccups, management and analysts expect the next quarter to look favourable given the digital demand outlook across the industry as well as the increased hiring numbers.

Pune based Persistent posted the second consecutive quarter of revenue dip in digital services (more than a fifth of revenues) of -1.7 per cent QoQ while overall revenue declined by 4.3 per cent QoQ. This decline was driven by a project that witnessed foreclosure and some client expectation mismatch concerns especially on the digital front said the management. “We take project renewals as an opportunity to renegotiate rates and if we don’t get the increments as expected than we prefer to exit such projects as we wouldn’t want our resources to be locked in such projects, “said Sunil Sapre, CFO, Persistent Systems.  

The attrition also increased from 14.8 per cent in 1QFY19 to 15.4 per cent in 2QFY19, emphasizing the increasing manpower issues since the last year. The company added 400 net people, the highest in three years and is seeking to hire more freshers and laterals over the next quarter while also move operations increasingly offshore to benefit margins.

Similarly, Mumbai based Hexaware posted slightly below estimate revenues at 1.6 per cent QoQ growth justified by unseasonal furloughs with a client, delays in ramp-up in two deals and staffing issues in the US with attrition jumping to 15.7 per cent up from 14.4 per cent in the September quarter. The company also lowered their revenue guidance from 12-13 per cent to 11-12 per cent.  Some projects with entirely onsite delivery models took a hit due to the manpower constraints in US markets. “The company is investing in a threefold plan to combat issues arising out of supply chain constraints. The first being improved compensation models, followed by better training programs as well as a focus on getting some of our Mexico global delivery centre employee base to fill the gaps,” R Srikrishna, CEO Hexaware told Business Standard.

Similarly, despite a strong order book and ramp up of some large deals from Q1, Pune based Zensar reported muted organic growth due to ramp down of couple of large deals in retail vertical as these deals wrapped up earlier than estimated. However, the management reiterated their positive outlook for the vertical in the coming quarters on the back of deal wins. Given their robust deal wins over the past year analysts have expressed confidence in the outlook. Even Persistent management sounded confident on the deal wins in the quarter to drive growth in the next quarter with high demand on digital side to get back on track by the end of the year.

Mindtree has been hiring aggressively over the quarter hinting the possibility of some upcoming large deal closures despite some softness in digital deal conversions. “While digital still accounts for 48.1 per cent of revenues, it has grown 0.6 per cent QoQ which is much below that of peers (who have a higher base) and have also unanimously indicated favourable demand environment for digital services. Some softness in pricing power has also been indicated as a result of higher percentage of fixed-price deals (56.1 per cent of all projects in 2QFY19),”noted Girish Pai, analyst, Nirmal Bang in a report.

Midcaps like L&T Infotech (LTI), Mphasis and NIIT Technologies also posted growth backed by some large deals and digital growth in line with analyst estimates. LTI clocked 12 per cent and 40 per cent in  QoQ and YoY terms respectively in Digital solutions (37 per cent of revenue) while Mphasis witnessed all time highest deal wins of $210 million in the quarter.