Midcap IT remains soft, but few growth outliers seen: CLSA

The midcap IT sector has seen pressure over the last 3-4 years due to growth slowdown and steady margin erosion. An analysis of December quarter results showed that they continued to under-grow global digital pure-plays sharply and have significant variance in their performance, CLSA said in a report. A combination of stronger growth and improving unit economics are not seen in the sector currently, it added. However, a few growth outliers were seen in Persistent, Hexaware, L&T Tech and L&T IT. The analysis has revealed that Persistent, Hexaware, L&T IT lead on growth, while eClerx, Mphasis and KPIT were a lag. Margins across IT sector have lowered to 10-15 percent from 15-20 percent three years ago. However, per unit revenues, and EBIT per employee have improved. Per unit revenues improved across most firms, with L&T Tech, L&T IT and Hexaware leading, while Cyient, KPIT and Mphasis were lagging. Persistent saw the most improvement in per unit revenues. The overall dollar revenue was soft with significant diversity in the average growth of 0.5 percent quarter on quarter (QoQ) and a 5 percent year on year (YoY). Persistent, Hexaware, L&T IT lead on this front, while Mphasis, KPIT, eClerx and NIIT Tech were laggards. In terms of service areas, BFSI, ERM, IMS and Engineering saw strong growth. “BFSI was strong at L&T IT and Hexaware, while transport was strong at Mindtree and L&T Tech,” the brokerage said in a report. ADM was weak for most companies, except for Mphasis and Hexaware. ERP was strong for all companies barring Mindtree. The brokerage sees strongest growth in YoY revenue in Persistent, L&T IT, Hexaware and Cyient. Persistent is also seeing a steady improvement in productivity.