Mid-tier IT firms show resilience amid demand slowdown
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Mid-tier IT firms are witnessing a lot of interest from investors in past two months. As the Nifty IT index shows signs of revival after one and half year of underperformance, several mid-tier IT stocks are witnessing interest from investors. The reason behind such enthusiasm is the optimism about growth revival in the mid-tier IT space. Despite scepticism, these companies have proved that they can survive any downturn. The resilience shown by these IT services firms during the current downturn has convinced analysts that once demand environment recovers, revenue growth would accelerate. In the last one and half years, most mid-tier IT companies have participated in the large cost takeout deal space. The traditional wisdom was large cost takeout deals usually favoured the big firms. However, Indian mid-tier IT services providers not only successfully participated in cost takeout deals, but were also able to increase their market share globally. According to analysts, the pricing competitiveness is helping many mid-tier IT firms to snatch deals from large players. Apart from this, mid-tier IT firms are also fast-moving in the emerging technology space. Especially, generative AI is one such domain, where these companies are showing agility.
Amid the slowdown, these companies have reduced their headcount and controlled the cost in order to stay competitive. Moreover, they are now aggressively chasing the inorganic growth path. Since the beginning of the year, many M&A deals have been clinched by these companies. For instance, In May, Coforge said it would acquire 54 per cent stake in engineering services firm, Cigniti Technologies for about $220 million. ITC Infotech, the IT services subsidiary of ITC Group, has announced the acquisition of Blazeclan Technologies for around $61 million. Happiest Minds is another company, which has acquired several firms in the recent past. Most significant among those is the announcement of the acquisition of PureSoftware for $94.5 million this year. Importantly, many of these acquisitions have come in the space of in the fastest growing, engineering services space.
Such moves indicate that mid-tier IT firms are moving fast to capture a pie of fast-moving segments. Another phenomenon has also helped Indian mid-tier companies. According to analysts, these domestic companies are gaining market share while many European entities are losing traction in the market. Due to the cost advantage, aggressive pricing and M&A deals, these entities are emerging as alternatives to their European counterparts in recent years. As European enterprises are fast embracing technology outsourcing, market share gain in this key market has helped Indian IT firms. Despite such positive factors, mid-tier IT companies have a long way to go. For turning their companies from $1 billion revenue firms to $5 billion top line companies, they need to bet on new themes. These themes could be GenAI or engineering services or any other new area that may emerge in coming years. So far, mid-tier IT companies have proved that their moves are giving dividends. However, given the premium valuations of these companies in the equity market, they have to constantly deliver in the coming years.
