Mid-cap IT companies trump sector biggies in first quarter

CORPORATE SCORECARD

Niche business focus, lower exposure to the banking and financial services (BFSI) segment and higher utilisation rates helped mid-cap IT firms perform better than even some of the large IT firms during the quarter ended June 30, 2008.

“For many, BFSI is not the core vertical firm and even if it is, they do not have the same pressure as many of the top tier IT firms have,” said an analyst from Motilal Oswal.

Mumbai-based Mastek, for instance, focused on the insurance and the government segment. The company gave a dollar guidance growth of 32 per cent for the next year. In comparison, Satyam Computer Services, which grew 46 per cent in dollar terms last year, has guided the markets with a 26 per cent dollar growth.

Mastek is one of the few IT firms that saw 50 per cent of its revenue coming from fixed-price contracts.

“The insurance business grew by 50 per cent. We also leveraged on the selling, general and administrative (SG&A) cost and improved our customer base. Our fixed-bid contracts contributed 50 per cent to the revenues,” said Sudhakar Ram, chairman and managing director, Mastek. Firms with a niche business focus such as, Mastek, Rolta, 3i Infotech, Infotech Enterprises, Bartronics and Zensar, too, did well.

Analysts said that though Tech Mahindra and Patni did well, client concentration and other income were the primary reasons for their growth. Bartronics, for instance, also performed well with regards to both its topline and bottomline growth that increased almost four times year-on-year (y-o-y) owing to margin expansion on account of high utilisation rates, and cheaper raw material costs.

The company focuses on a niche area like smart cards and radio frequency identification (RFID) chips — both are rapidly expanding markets in India and globally, too.

In the case of Tech Mahindra (larger than the mid-cap firms), even if there is concerns about the company’s dependence on British Telecom, many feel that the recent deal of around Rs 3,000 crore from BT shows some positive signs.
 

NICHE FOCUS
Company	June 30, 2008		Y-o-Y (in %)		Q-o-Q (in %)		Forex gain (loss)  in Rs cr
	Revenue	PAT	Revenue	PAT	Revenue	PAT
NIIT Tech	245.8	35.1	7.14	0	-1.08	13.2	-6.3
Tech Maha	1116.4	258.7	27.39	51.8	2.3	10.6	-20
Sasken	168.1	13.7	21	114	6.9	-7.4
Mastek	249.8	39	33.5	65	4.5	11.4	-0.49
Rolta	307.6	50.8	48.3	4	6.69	-22.6	-30
Patni	783.7	234.1	11.8	4.6	3.5	9.5	-20.16
Zensar	211.07	24.73	12.3	85	3.4	14.8	3
Nucleus	82.89	8.02	24.36	-42.7	6.18	-49.9	-7.48

“In such times of economic slowdown and uncertainty in IT spending, this strong revenue visibility over the long-term is a comforting factor and it instills confidence about the company’s med-term growth prospects,” said Angel Broking analysts in their report. “Some of the mid-cap firms performed better than the large-cap firms as exposure to the BFSI segment was low and also they have a better spread of business.

For instance, 3I Infotech, despite the fact that its business is focused on the BFSI segment, the firm has a good geographical spread,” adds Harit Shah, research analyst, Angel Broking. However, forex losses remain a major concern. “If the rupee remains volatile, it will be difficult for the mid-cap IT firms, especially when the large firms are struggling,” Shah said.

For most of these firms, the sequential numbers were down on account of forex losses. Infotech Enterprises, which saw its EBIDTA margin expand by 16 per cent quarter -on- quarter (q-o-q), its bottomline recorded a 5.3 per cent fall for the first quarter.

Rolta is another instance, which had to make a provision for Rs 30 crore on account of foreign currency convertible bonds (FCCBs) issued by the company.