Beyond the big four: How are "other" Indian IT Services firms doing?

When we think of the Indian IT services industry, we think of TCS, Infosys, Wipro and HCL. How have the other firms in the sector dealt with the crisis?

When we first wrote about “green shoots turning to brown” last month, we had ended by quoting V Anantha Nageswaran’s blog post. He had written:

What this shows is that when shocks affect all sectors equally, then the approximation mechanisms and formulae adopted by statistical agencies (for example, using growth or contraction in the formal sector to gauge the fluctuations in activity in the informal sector) do hold. However, when the shock is idiosyncratic (that is, it affects only one sector – like demonetisation did – for the informal sector that is largely or fully cash-based), then the approximation mechanisms break down and they end up giving misleading results. 

That is what happened with the real GDP growth estimation in 2016-17. In a way, the statistical system ends up doing a big disservice to policymakers, for it sends the wrong signal about the health and dynamism of the economy.

What is true of the economy at large is also true of a particular sector. A common mistake we make when analysing a particular sector is to simply look at the biggest firms in the sector (since those are names we recognise and stocks we invest in), and look at how they are doing.

The problem, however, is that the performance of big firms in a sector is not necessarily correlated with the performance of the sector itself. The last time we spoke about Indian IT Services, for example, we had stuck to the performance of the four big firms (Cognizant is listed in the US so it has been “purposefully left out of scope” here). We had written about a shift towards digital, and HCL Tech and Infosys managing to improve their profits despite the pandemic. Does this constitute a trend? Are smaller IT services companies seeing similar results?

The Economic Times reports that mid-sized IT services firms are seeing deal flow once again, after it had stalled in March. Based on this article, and the number of companies mentioned in it, the recovery seems rather broad-based. The article is well summarised in this one graphic:

Source: The Economic Times

And once again, like their bigger cousins, it looks like “digital” is working for these firms.

Zensar Technologies, which had a deal pipeline of $600 million at the end of March, said it had reached $1 billion by early May. 

“About 70% of this is from digital deals. There will be significantly higher cloud adoption and the post Covid-19 systems of engagement will change to become more virtual,” CEO Sandeep Kishore told ET. 

For example, one of Zensar’s recent acquisitions has launched an “end to end digital offering”. And for the third year in a row, Zensar has been recognised in the Gartner Magic Quadrant for Managed Workspace Services, which falls under the realm of “digital”. This is from a press release, but worth reading:

Zensar's Digital Workplace is one of the four strategic pillars of Cloud and Infrastructure Services and one of the fastest growing business units within the organization.

However, Zensar’s quarterly profits were 7% down from last year. Meanwhile, the company has launched a “virtual onboarding program” for recruits from tier 2 and tier 3 cities.

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It is a similar story at Mindtree.

“Large deal ramp-ups have been on track, and we continue to carry out transitions virtually using our robust transition methodology. New deals are majorly around offerings like client experience, data and insights and cloud adoption, with significant uptick in digital transformation,” said Dayapatra Nevatia, chief operating officer of Mindtree. 

And the company seems to have re-jigged its businesses in terms of service lines, rather than sectors.

The result of the exercise was setting up of four service lines, which are not new service lines, but existing lines bundled into four boxes to take the offerings in a much more focused manner to clients. These are customer success, data and intelligence, cloud and enterprise IT. “We want to drive the growth through the top 20, 30 clients and continue to rationalise the long tail, Chatterjee said. He also pointed out that the refresh strategy had nothing to do with the pandemic.

When someone explicitly says that something “has nothing to do with the pandemic”, we should maybe take that with a pinch of salt. However, it is interesting that data and intelligence and cloud are among Mindtree’s service lines. It is also interesting that they didn’t explicitly mention “digital”.

The company’s financial results last quarter were spectacular, with profits going up 130% (YoY), but revenue was only 4.1% higher. The ET article fails to mention if there was something extraordinary that contributed to this massive increase in profits.

One of the challenges Mindtree faces is that over the last couple of years the company has been in the news mainly for the wrong reasons. Last July, VG Siddhartha, who used to be its largest shareholder at one point of time, committed suicide. Just prior to that, the company was embroiled in a protracted hostile takeover, as Siddhartha had sold his stake to L&T Infotech, a move much opposed by the founders and management of Mindtree.

While Mindtree does data and intelligence, and cloud, without explicitly talking about “digital”, its now largest shareholder L&T Infotech has launched a “digital platform to work from anywhere”. The assumption doesn’t explicitly mention whether the launch has something to do with the pandemic or not.

That said, the company isn’t doing badly, with revenues growing 10.6% YoY (curiously, this article doesn’t talk about profit growth, but we can calculate it to be around the same ballpark). The article, however, goes on to say:

The company said its deal pipeline is better than the year-ago period and it expects to close large deal wins in the current quarter as well.

According to analysts, L&T Infotech is one of the rare companies, with the possible exception of Infosys Ltd, which will likely report revenue growth in the current fiscal year.

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Tech Mahindra does not hesitate from directly talking about “digital”.

CP Gurnani, Managing Director and Chief Executive Officer, Tech Mahindra, said, “We are witnessing a wave of new age technologies being adopted by the customers as businesses across the globe are actively pursuing digital transformation.  

The company, whose profits were largely flat despite a 5% increase in revenue, has also started a covid-19 screening service.

The company added that the Mhealthy service comprises over 32 screening tests on a single platform and detects antibodies with 96% accuracy.

"Mhealthy can detect antibodies. We have done screening of our employees and results have been 96 per cent accurate. A lot of people were not even aware of other problems like blood glucose and hypertension," Tech Mahindra Global Chief People Officer and Head of Marketing Harshvendra Soin said.

While the company makes no claims of how many drops of blood are used to do these 32 screening tests, it is not hard to be reminded of another “tech” company. Moreover, we find it hard to parse “96% accurate” and “lot of people were not even aware” in consecutive sentences.

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Hexaware saw largely flat profits, despite higher revenues. Its stock price has shot up, though, primarily because the promoters have announced that it is likely to be delisted.

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And while the rest of industry talks about digital, Mphasis has decided to emphasise on “deep tech”. That said, “digital” contributed to more than half of the company’s revenue, except that it called it “new gen”.

The company won new deals worth total contract value (TCV) of $259 million in Q1 with 79% of the deals belonging to the ‘new-gen’ services that basically refer to its digital business comprising of cloud, automation, and related technologies.

The ‘new-gen’ services revenue grew 28.4% annually on a reported basis and contributed 53.8% to its direct core revenue for the first quarter.

And in terms of “deal wins”, it looks like the company had its best ever quarter. Maybe that explains the stock’s spectacular performance this year despite only a 4% increase in revenues (YoY).

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The resemblance is uncanny. Taken together, this bouquet of “mid tier IT Services firms” has not performed very differently from the “big four” as far as quarterly results are concerned. Most companies have seen flat, or mildly positive, profit growth; and flat, or mildly positive revenue growth.

Everyone seems to be talking about digital (though some might use different words for it). Everyone seems to continue to be winning deals. However, the big change in the last quarter is that these firms that were mostly used to employees working on premise, have had to move to a largely work from home model. It might take a quarter (or two) to see whether that is going to affect performance, and in what direction.

And large and mid-tier Indian IT services firms might all be doing fine. That still doesn’t mean that the entire sector is fine.