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Mid-Sized IT Companies Gain Ground as TCS and Infosys Struggle

Mid-Tier IT Firms Outshine Giants Amid Economic Turmoil: Clients Flock to Cost-Effective Solutions

23 May 2024

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Neelesh Bachani

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1.      Mid-tier IT companies such as LTIMindtree, Coforge, Mphasis, and Persistent Systems have become the preferred choice for clients dealing with inflation and economic uncertainties. These companies offer cost-effective, short-term solutions, attracting clients who need to cut expenses, contrasting with larger firms' focus on big, long-term projects.


2.      These mid-sized firms are gaining market share in the $254 billion IT sector, with data from BNP Paribas showing a 17 basis point drop in the market share of India's top five IT firms due to their rise. Stock market performance has also been strong, with Mphasis and Persistent Systems' shares rising 23.7% and 42.5% respectively, outperforming the broader Nifty IT Index's 16% increase.


3.      Clients currently prefer service providers that deliver high-quality services at lower costs with predictable outcomes. Analysts believe mid-tier companies will continue to benefit as economic conditions improve, positioning them well to attract budget-conscious clients amid expectations of sustained high US interest rates.

Mid-tier IT companies have emerged as the preferred choice for clients navigating through inflation and economic uncertainties, overshadowing industry giants like Tata Consultancy Services (TCS) and Infosys. These mid-sized firms are gaining market share in the $254 billion IT sector by catering to clients' needs for cost-effective solutions. As clients reduce spending due to economic pressures, analysts note that mid-tier companies' focus on shorter, more affordable deals has become increasingly attractive. This approach contrasts with the larger firms' emphasis on securing big, long-term projects.

 

LTIMindtree, Coforge, Mphasis, and Persistent Systems have been identified by Kotak Institutional Equities as rising challengers in securing Fortune 500 accounts, contributing to their growing market share. Analysts at Kotak suggest that these mid-sized companies could further benefit as clients resume higher spending levels. The ongoing economic conditions and expectations of sustained high US interest rates position these firms well to attract budget-conscious clients looking for quality services at lower costs.

 

Last year, the overall revenue growth in the IT industry slowed to 3.8%, according to Nasscom, underscoring the challenging market environment. Avinash Baliga, a partner at consulting firm Avasant, highlighted the client's preference for service providers that deliver high-quality services with predictable outcomes at reduced costs. Leaders of mid-tier companies such as Persistent Systems and Mphasis have acknowledged their success in gaining market share amidst these conditions, while larger firms like TCS and Infosys have remained silent on the matter.

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Manish Dugar, CFO of Mphasis, emphasized that their competitive edge lies in their skills rather than their size, which has helped them stand strong against larger rivals. Data from BNP Paribas shared with Reuters indicates a 17 basis point drop in the market share of India's top five IT firms in 2023, attributed to the rise of mid-tier companies. Despite this decline, these top five companies still hold a significant portion of the market, around 88.35%, among the top ten firms.

 

The stock market performance reflects the growing prominence of mid-tier firms, with shares of Mphasis and Persistent Systems experiencing substantial gains of 23.7% and 42.5% respectively over the past year. In comparison, the broader Nifty IT Index rose by 16% during the same period. In April, Infosys projected its revenue growth for fiscal 2025 to be between 1% and 3% in constant currency terms, which fell short of most analysts' expectations.

 

Ashok Soota, founder of the mid-tier IT firm Happiest Minds Technologies, noted that larger players have become more conservative in their growth estimates due to their size. Happiest Minds Technologies has also seen an increase in market share, mirroring the trend observed among other mid-sized firms. This shift towards mid-tier companies highlights the changing dynamics within the IT industry, driven by clients' needs for efficiency and cost savings in a challenging economic landscape

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