Debasis Mohapatra
Bengaluru, 31 August 2024
Macroeconomic recovery is likely to accelerate the growth prospects of Indian mid-tier IT services companies higher than large IT services companies.
Brokerage firm, Prabhudas Lilladher in a report noted that factors like execution agility and flexibility; participation in vendor consolidation; smaller deal sizes would act in favour of mid-tier IT services companies.
“We believe, as macro recovery gathers pace and spending sentiment improves, mid & small-cap IT outsourcing providers continue to benefit through their niche and deep expertise developed within key verticals along with execution agility and flexibility; participation in vendor consolidation and winning disproportionately over large caps,” the report said.
“Enterprise deal sizes become more fragmented and benefiting mid-caps versus one-shot large mega deal awarding to a single large vendor, in a bid to de-risk vendor dependency (supplementing growth of mid-tier IT firms),” the report added.
Initiating coverage on three mid-tier IT firms- Cyient, Persistent and Mphasis, the brokerage firm said these firms are likely to perform better in coming quarters if the macroeconomy improves.
“We expect aerospace and sustainability verticals to sustain the growth momentum and outpace consolidated revenue growth. Consequently, we expect Cyient DET (Digital, Engineering & Technology) USD revenue and PAT (in rupees) to grow at a CAGR of 6.8% and 9.8%, respectively, over FY24-FY27 period,” the report said.
The brokerage firm also expects Mphasis’ performance to improve with mortgage market showing early signs of improvement in the US.
“With mortgage rates in the US showing early signs of moderation and macro indicators turning positive, we expect the DR (Digital Risk) business to see a recovery from FY25. We estimate revenue and earnings of the consolidated business to clock 10.7% and 13.9% CAGR, respectively, while the direct business would grow at a CAGR of 11.2% over FY24-FY27 period,” the report said.
On Persistent Systems, the report said, “We expect Persistent Systems to outpace its peers yet again in FY25E with USD revenue growth of 15.9% YoY, followed by a strong rebound in the following years with a CAGR of 17.4% over FY24-FY27E. However, we expect margins to be range bound in FY25E before improving by 80 basis points and 70 basis points in FY26E and FY27E, respectively.”
