Midcap IT companies may outperform top six companies in March quarter

According to analysts, while top IT firms may face several headwinds, factors such as regular execution of smaller deals, frequently billable projects and a smaller revenue base work in favor of mid-cap IT firms such as Cyient, Persistent Systems, can do. And Coforge in the March quarter as well as in this fiscal year.

Data from brokerage firm Motilal Oswal estimated mid-cap IT service providers whose market cap 5,000-20,000 crore following a sequential revenue growth of 3-5% in the March quarter. Operating margin is also expected to increase by 200 basis points during the period, while net profit is projected to increase by 5.3%. It is estimated to grow by 2.9%.

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Onkar Tanksale, equity research analyst at brokerage firm Axis Securities, said mid-cap firms would have a “clear edge” over their larger counterparts as their regular deal signing and execution pipelines work.

“Most mid-cap companies are not the primary outsourcing partner for companies, no matter which sector you look at. As a result, most deals in mid-cap and small-cap companies are based on core tech projects like cloud migration or digital transformation, which are unlikely to be postponed or cancelled. As a result, mid-cap companies are likely to see project billing frequency continue to increase at a more regular pace, compared to large-cap IT companies, which will see some of their deal pipeline being deferred,” Tanksale said.

However, while these factors may give a momentary boost to the mid-cap market, analysts expect larger companies to make a comeback after the September quarter. As a result, firms such as Tata Consultancy Services, Infosys, HCLTech, Wipro, Tech Mahindra and LTIMindtree are likely to see a turnaround in revenue growth after H1FY24.

Apoorva Prasad, vice-president of institutional research at HDFC Securities, told Mint that the shift is likely to stem from an increased focus on “cost optimization deals”, which may offer smaller billable amounts and shorter tenures than large-caps. . to sign.

“It is important to note that some inflationary pressures have already started easing, and by the September quarter, most such issues should clear up and tech spending should be restored – something that favors large-cap IT firms. can work in Till then, focus on smaller and shorter duration deals will be the key for the sector,” Prasad said.

While both large and mid-caps receive more than 80% of their business from clients between $1-10 million, larger companies rely more heavily on deals of $10 million and above to contribute the bulk of their revenue. . For example, data for the December quarter shows that mid-cap firm Coforge has 21 active clients above $10 million. In comparison, TCS had 935 customers over $10 million, with 59 active customers over $100 million.

Going forward, companies such as TCS may see a decline in active ‘large deals’ – a factor that will not affect mid-caps.