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Mid-tier IT companies at more risk than big players

By Debasis Mohapatra
April 15, 2020 13:14 IST
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In the mid-tier space, clients with weak balance sheets are likely to ask for price revision apart from delay in payment.

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Illustration: Dominic Xavier/Rediff.com

Mid-tier IT services firms, along with small technology companies, face higher risk to business operations because of the coronavirus disease (Covid-19), compared to their larger peers, according to industry experts.

They said higher dependence on some of the most affected business segments along with low fire power in terms of cash reserve make these smaller firms vulnerable in case things don’t improve in the coming quarter.

 

Also, exposure to smaller clients and dependence on higher number of small deals could be seen as weak links for the firms in the current environment.

“Tier-1 IT firms mostly have Fortune-500 companies as clients. So, when things become better, these companies will start capital expenditure, which make bigger companies less vulnerable to the current crisis.

"In the mid-tier space, things are different as clients with weak balance sheets are likely to ask for price revision apart from delay in payment,” said Sanjeev Hota, head of research at Mumbai-based brokerage Sharekhan.

“Also concentration risk, in terms both of geography and business verticals, make mid-tier firms more prone to risks arising from the Covid-19 crisis,” Hota added.

Many nations, including the US have shut establishments apart from imposing strict restriction on travel, because of the pandemic.

While most business verticals of IT firms have seen a dip in demand, travel and hospitality, and retail segments have been affected most.

According to a note by Anand Rathi, among the mid-tier IT firms while Sonata Software draws around 53 per cent revenue from retail and travel verticals, Mastek has 34 per cent exposure to these verticals.

Similarly, Mindtree draws around 30 per cent of revenue from these segments, which stands at 29 per cent for NIIT Technology. For L&T Infotech, these two verticals contribute 11 per cent of top line, while for Tech Mahindra and Mphasis, it stands at seven per cent.

Usually, most mid-tier firms also face client concentration risk as top 10 clients contribute a large part of the revenues of these companies.

So, any client-specific risk has the potential to pull down earnings.

Also, strong balance sheet with robust cash reserves give big IT services firms’ better fire power to carry on business without much cost optimisation.

Market leader Tata Consultancy Services (TCS) and Infosys have more than $2 billion of cash reserve each, which put these firms in good stead to manage the current disruption.

Among the mid-tier firms, Hexaware Technologies was the first company to flag concerns related to the pandemic.

Its chief executive officer R Srikrishna said that verticals like travel and transportation, and consumer, to a lesser extent, would be impacted during January-September.

Earlier, industry body NASSCOM requested the government and public sector businesses to release pending payments to small and medium technology firms to tide over the liquidity mismatch.

The industry body also urged the Center to defer payment of advance income tax in the first quarter.

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Debasis Mohapatra in Bengaluru
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