/The relative performance of Mid-cap IT Services firms — and how a crisis is differentiating the winners from the also-rans

The relative performance of Mid-cap IT Services firms — and how a crisis is differentiating the winners from the also-rans

The Covid-19 pandemic has been the black swan event that no one saw. The crisis is likely to further differentiate the few mid-cap IT firms that have shown resilience and predictability of execution in the past few years from their remaining counterparts.

Within the IT services space, the impact of the pandemic was likely to be the most pronounced on the mid-cap IT services segment. With smaller balance sheets and, in some instances, with greater exposure to troubled segments, the risk exposure of this segment is relatively high. The CEOs of some of the larger firms have obliquely called out the strength of their balance sheets, their ability to acquire firms during a crisis and the likelihood of client spend consolidation as the bright spots for them emerging from the crisis.

Looking at the last two quarters’ results, what is interesting is that, despite the pandemic, the strong performers among the mid-tier IT firms continue to do very well compared to their mid-tier IT services counterparts.

The mid-tier IT services cohort has normally comprised 10 contenders. They include Mindtree, MphasiS, NIIT Technologies, Larsen & Toubro Infotech, Persistent, Hexaware, Zensar, Sonata Software, Larsen and Toubro Tech Services and Tata Elxsi.

Results analyses over the past three years show that there has been a new performance stack ranking which has emerged when one considers the parameters of organic revenue growth rate, EBITDA profile improvement, market cap increase and predictability of performance. Importantly, the firms that have done well on these parameters and are higher up the performance stack rank appear to be weathering the headwinds better than their other counterparts.

Till two or three years ago, the strong performers in the mid-tier category included MphasiS, LTI, Hexaware and Persistent. Over the past few years, there has been significant churn in relative performance based on the four parameters outlined earlier. The clear leaders in terms of performance now are NIIT Technologies and LTI. It will be interesting to see how performance stack ranks change heading into the future.

Each of these four parameters (predictability of performance, organic revenue growth, EBITDA performance and market cap increase) merits a quick overview since past performance is likely to mirror future performance.

On the predictability of results front, the rank order in terms of quarterly results predictability (steady growth) would be NIIT Tech and LTI (in that order — refer to Table 1). NIIT Tech comes out as a clear winner with growth every quarter coming in at a sustained clip. LTI has registered solid growth, but the past four quarters have seen it clock quarterly growth numbers of both 0.9 at one end and the very impressive 8.4% at the other. Both firms have outpaced others within their cohort. Interestingly, Persistent has shown the most choppy track record during the same period on this front.

In terms of the highest margin profiles, LTI and MphasiS clock an impressive 18.7%, with the relatively smaller NIIT Tech at 17.9%. The other interesting anomaly that this throws up is that the mid-tier firms with the highest claimed percentage of revenues from digital, i.e. Zensar and Mindtree, are the ones that are lagging on the margin front.

The highest returns for shareholders over the previous three-year period (time period May 2017-May 2020) have been registered by NIIT Technologies, followed by LTI and then Mindtree. A Rs100 investment in NIIT Technologies, LTI and Mindtree in April 2017 would have been worth (approximately) Rs340, Rs255 and Rs200, respectively, in May 2020.

In terms of the highest organic growth rate (net of acquisitions during this period) the stack ranking would be NIIT Tech, LTI and MphasiS (see Table 2).

Of the two firms that rank at the top, LTI has managed to retain its ranking in the best-performing mid-tier firm category. NIIT Technologies has made a very strong bid to challenge LTI in the past few years and the two are clearly outdistancing their other mid-tier counterparts on performance parameters. Some of the contenders, like Persistent, seem to be finding their feet again and this promises to be an interesting relay.


Revenue Growth QoQ


Content, Analysis, Compilation and Verification by Angshuman Bonnerjee

Disclaimer: Content Produced by Angshuman Bonnerjee

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