Short Call | The Mantra for mid-tier IT firms; Ujjivan Bank, Colgate in focus

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26 Aug, 2025 12:21

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Mid-tier information technology (IT) companies are turning to acquisitions to counter the demand slowdown experienced over recent quarters due to macroeconomic challenges in key markets.

"Most companies are open to focused inorganic investments to scale faster, expand market presence and address white spaces in capabilities," Kotak Institutional Equities said after evaluating 11 mid-tier tech firms at its inaugural midcap conference.

For instance, Sonata Software expects to benefit from being the launch partner for Microsoft Fabric—a unified data analytics platform—and believes it is slightly ahead of peers in Gen AI. Similarly, eClerx has its eye on acquisitions offering Salesforce and Adobe implementation and analytics capabilities. SaaS player RateGain is considering assets of significant scale that could help in establishing a leadership position in its space.

Growth prospects also vary across firms. Sonata Software expects revenue growth to pick up in the second half of FY25, setting the stage for robust performance in FY26. Cyient projects near-term growth, aided by broad-based vertical performance, while Newgen Software is banking on the Middle East market for continued momentum.

All in all, investments in nascent technologies like generative AI, along with acquisition strategies, are the mantra for mid-tier IT companies moving forward. However, such growth strategies are not without execution risks and are something that investors need to consider before diving in.

Ujjivan Small Finance Bank (Rs 35, +7%)

Board approves sale of bad loans worth Rs 270 crore

Bull case: Ujjivan SFB's proactive approach to resolving stressed assets through the sale of its NPA portfolio demonstrates effective risk management, potentially stabilising asset quality and improving profitability in the long run. The stable GNPA and low net NPA levels, coupled with the growing NII, suggest the bank is well-positioned to navigate sectoral challenges and capitalise on growth opportunities in non-MFI segments.

Bear case: The withdrawal of growth and RoE guidance, coupled with a downward revision in NIM, highlights ongoing vulnerabilities in the MFI segment, which could weigh on the bank's performance. Additionally, the significant haircut on the stressed asset sale may signal deeper systemic issues, limiting investor confidence and near-term growth prospects.

Colgate-Palmolive (Rs 3,002, -0.5%)

Recently concluded its Investor’s Day, leaving brokerages mixed in their outlook.

Bull Case: The firm's management focusing on pushing consumers to up-trade and driving per capita consumption.  Colgate Palmolive (India)'s key focus is on urban markets, with the strategy of pushing brushing twice a day, and attempting to create awareness and improving usage in rural markets. With growth slowing in urban and growth recovery plateauing in rural, Colgate is looking at a balanced mix of volume and price growth.

Bear Case: The management shared that the margins would be at the lower end of the guidance band for FY25. The top brass also alluded to softening category growth in urban markets. The commentary is in-line with larger trend seen emerging in the earnings season gone by, with urban consumption taking a backseat as consumers tighten their spending.

(With inputs from Lovisha and Zoya)