Mid tier IT companies growing faster than biggies

This may come as a surprise. Mid-tier Indian IT firms have been doing as well or better than their top-tier counterparts in recent times. Normally in a downturn, the mid-tier segment tends to be more adversely impacted because customers who are still able to spend on IT prefer the safety of the more established players. But that's not the case now. In fact, the only exception in recent times was the global recession year of 2009-10, when mid-tier firms performed worse than top-tier ones. 
Companies like KPIT Cummins, eClerx, MindTree, Persistent Systems, Polaris, Infotech, InfoEdge, Geometric, NIIT Tech, CMC and Zensar had revenue growth rates that were well over 20% in each of the last two years - 2010-11 and 2011-12. Among the best of these were KPIT Cummins, with growth rates of 46% and 38%; eClerx with 37% and 29%; and Zensar with 25% and 46%. In the first quarter of this year, KPIT Cummins' revenue grew 88% to Rs 538.3 crore, Hexaware's grew 37.6% to Rs 438.3 crore and Persistent Systems' grew 34% to Rs 301 crore. 

There are several reasons for these blazing performances. Broking firm Edelweiss Securities says a major factor is the repositioning of mid-tier firms as more specialized players since the last downturn. Hexaware and NIIT Tech focused a lot more on the travel and transportation domains, Persistent Systems specialized in outsourced product development, MindTree in manufacturing and KPIT Cummins in automotive. 

"This strategy of specialization has enabled mid-tiers not only to get invited to new RFPs (request for proposals) in those verticals but also to participate in newer, complex deals from first-time outsourcers in emerging markets," says Edelweiss. 

There's also been a shift in the structure of deals that has benefited mid-size players. Research firm Information Services Group estimates that contracts in the value range of $25 million to $99 million have surged from 481 in 2008 to 770 in 2011, while contracts with a value of more than $100 million have remained stagnant at 224 over the same time. 

Sid Pai, partner in Information Services Group, says this fragmentation of deals constitutes a significant opportunity for mid-tier players, and more so given their specialization. 

Edelweiss says the sudden increase in deals is being driven by first-time outsourcers who want to test-check the outsourcing model with small-sized deals and with vendors who can give them customized solutions. 

Mid-tier players also benefit from the 18% to 30% differential between the prices they charge compared to those of top-tier players. The top players charge a premium for their domain expertise and track record to execute large and complex deals. Edelweiss says in the current uncertain environment, this price difference would play out in favour of mid-tier companies. 

Ankita Vashistha, MD of outsourcing advisory firm Tholons, says IT outsourcing is now "mainstreamed", with many more companies adopting outsourcing and technology to cut costs and realize alternative revenue streams in an increasingly competitive and volatile market. 

"A large number of mid-tier IT companies are engaging in vertical solutions for large clients and cost optimization for mid-tier clients. We expect mid-tier IT firms to grow in the 22-26% range this year, which is an improvement from a year ago," she says.