Is bumpy road ahead for mid-tier IT firms?

Bengaluru: After outperforming their peers in the last two years, growth in Indian mid-tier IT companies is likely to moderate more than their larger peers in case the slowdown hits the global IT industry.

Industry watchers said there are no signs of slowdown yet on the demand environment, which remains unchanged. However, deal flow in the April-June period (Q1 of FY23) will provide the first indication of client spend in this fiscal year.

"Mid-tier IT firms had a stellar run in the last one-and-a-half-years as they got benefitted from the huge spending on digital transformation projects by enterprises. They have performed better than their larger peers. However, if slowdown in spending happens, these companies will be affected first as several projects bagged mid-tier IT firms are short-term in nature," said Pareekh Jain, an IT outsourcing advisor & Founder of Pareekh Consulting.

"Digital projects also constitute bulk of order book of mid-tier IT firms and if slowdown happens, decision-making on such projects is likely to be delayed," he added. He, however, said that there was no indication of any demand slowdown as yet. Most mid-tier firms have grown their revenues in high-teens in FY22 with sound deal pipeline. Mindtree's dollar revenues grew 31 per cent in FY23 on year-on-year basis, while its order book stood at more than $1.6 billion. L&T Infotech saw its revenues growing 25.9 per cent YoY basis in FY22. Mphasis' revenue grew 22.4 per cent in FY22 with new TCV (total contract value) wins of $1.43 billion.

Persistent Systems' revenue saw a growth rate of 35.2 per cent, while Birlasoft grew its revenue around 16 per cent in FY22. Similarly, L&T Technology Services witnessed its revenues growing around 20 per cent YoY in FY22 with a sound order book size.

Given the high growth rate registered by most mid-tier IT firms, demand slowdown would moderate these numbers as compared to larger peers.

"Most contracts won by large IT firms are multi-year in nature. So, it gives a cushion to large firms at the time of any downturn as there is certain assurance on revenue flow. This may not be the case in mid-tier firms as the deals are short-term in nature," said an IT expert.

JP Morgan in a recent note has anticipated a slowdown in IT spending as many enterprises become cautious on their technology budgets. Though management of any Indian IT firm has not flagged up concerns over slowdown, sources in the know said small-ticket digital deals are facing decision-delays in some companies.