IT services – Mid-cap :: Advantage: Niche Services :IFIN Research

 Mid tier Indian IT vendors are expected to grow at a faster pace than large Indian IT vendors in USD revenue for FY13 and FY14.
 EBIT margin of mid tier Indian IT vendors will remain weaker than that for the large IT companies.
 PAT margin of most of the mid tier Indian IT vendors would be in single digit.
 PAT growth of large and mid tier Indian IT vendors is expected to be almost at par in FY13 and FY14.
 Mid tier Indian IT vendors are concentrating on few business verticals for driving growth.
 Mid tier Indian IT vendors provide niche service offerings and have higher focus on non-linear services.

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Revenue growth of Indian IT vendors
Large Indian IT vendors have witnessed double digit USD revenue growth over the last 2 years on back of ramp ups in the BFSI vertical. In FY13 and FY14, we expect sluggishness in the BFSI vertical, which is the reason that growth will be slightly muted for large Indian IT vendors. On the other hand, mid tier Indian IT vendors will continue to report strong double digit revenue growth - in the range of 16-20% - for FY13, due to their lower exposure to the BFSI vertical, niche service offerings and strong emphasis on non linear services which will also have a positive impact on their realisations.


EBIT margin of Indian IT vendors
Large Indian IT vendors have always commanded a higher EBIT margin over mid tier IT vendors. We expect the trend to continue in FY13 and FY14, as EBIT margins of large Indian IT vendors will be higher. EBIT margin of mid tier IT vendors have been under pressure due to higher quantum of salary hike and higher addition of laterals. Change in pyramid structure, higher off shoring and emphasis on non-linear services will provide support to EBIT margin of mid tier IT vendors in FY13 and FY14 and we expect their margins to grow at a faster pace than that of large Indian IT vendors.


PAT margin of Indian IT vendors
We expect the PAT margin of large Indian IT vendors to witness a dip from current levels of 18-30% on the back of forex loss on hedge positions taken by them for FY13. We expect the PAT margin to remain flat for FY14. Mid tier Indian IT vendors have also been facing immense pressure on operating margins and forex losses. We therefore expect a single digit to low double digit PAT margins for most of the mid tier IT vendors for FY13 and FY14.


PAT growth of Indian IT vendors
Large Indian IT vendorsa are expected to report an impressive performance in terms of PAT growth, notwithstanding the high base. On the other hand, the mi-tier IT companies would need a sharp improvement in the operating margins in order to put up a comparable performance


Business verticals of Indian IT vendors
Large Indian IT vendors have high exposure to the BFSI vertical, which may pose concerns for growth in FY13 due to the uncertain horizon for US banks. Large Indian IT vendors are well diversified across various busienss verticals. BFSI, telecom, manufacturing and healthcare are the key dominating verticals for large Indian IT vendors. Mid tier Indian IT vendors are focussed on specific key verticals on the basis of their niche service offerings. NIIT Tech and Zensar are examples of mid tier IT companies which have diversified exposure across various business verticals.


Service offerings of Indian IT vendors
Large Indian IT vendors have an extensive list of service offerings which enables them to do large end to end based IT projects. ADM constitues a major chunk of reveneus for large Indian IT vendors. Other dominating service lines include IMS and EAS. Mid tier Indian IT vendors have niche service lines and have high exposure to few service lines like PLM, IMS and EAS. For example, Persistent Systems derives 45% of its reveneus from cloud, busienss analytics, mobilty and other emerging service lines. NIIT Tech on the other hand has well diversified exposure to major service lines.