Mid-size IT cos alive & ticking
The Economic Times, October 23, 2009
Despite Talk Of Consolidation, Some Of These Cos Have Emerged As Good Long-Term Bets


A decade ago when setting up an IT firm was still considered to be one of the best career options by geeks in India, industry trackers were certain that a phase of consolidation would follow.

Ten years down the line, bets on a shake-out in the small and mid-size IT segment are off, with many such companies having emerged as an important aspect of global outsourcing model. Some companies in this segment have even emerged as good investment bets for long-term investors. There are over 100 listed IT companies in this segment each with annual revenue of less than Rs 1,200 crore. After surviving the tech meltdown of the late 90s, most of these companies have increased their presence in the last few years. On a trailing twelve months basis, these account for 24% of the total sector revenue of Rs 1,49,000 crore. Three years ago their share was 19%.

What is it that has helped these firms to stay in business despite the ups and downs of business cycles? Milan Sheth, E&Y’s partner in technology practice talks about the two-factor strategy that has worked for the small and medium IT firms.

“These companies have focused on opportunities, which are mostly under-serviced by IT giants. They have created a niche either in geographies or in domains,” he says. The second reason in his opinion is that they have largely serviced unconventional clients, which are mostly left unattended by the top tier IT providers.

Take for instance the Rs 979-crore Mumbai based Mastek. After dabbling in IT services in the 1990s, the company was quick to identify insurance as key domain at the beginning of the current decade. Since then it has created its own insurance platform and competes with global major CSC in this segment. The company also identified UK as a potential market unlike the US, which has been widely serviced by IT giants.

Apart from insurance, Mastek has also provided solutions to UK’s government sector, the prominent among these is National Health Service (NHS) project and London traffic congestion solution. Both these projects fall in the category of unconventional clients.

Mastek’s chairman and MD Sudhakar Ram thinks, “Mid-tier companies have created a differential in services offering. That’s why many of us don’t compete with top tier Indian service providers directly.”

Bangalore-based Subex is another example where niche strategy played an important role. Founded in 1991 as a systems integration outfit, Subex decided to enter the telecom solutions space in 1999. “The sector was growing across various geographies and we thought the time was opportune,” says the company’s founder chairman and MD Subash Menon. Today, with revenues in excess of Rs 600 crore, the company competes with global peers including Amdocs and Convergys offering operations support system (OSS) in telecom space.

Would it have been wise to sell their businesses at the peak of the valuation cycle? For instance, Mastek commanded a market capitalisation of over Rs 3,000 crore during the dotcom era of the late nineties. Today, the company has a market capitalisation of just over Rs 750 crore.

It is true that quite a few IT providers sold businesses. Mphasis, which was sold to EDS and Aztecksoft, which was acquired by another mid-tier firm MindTree are some of the prominent examples.

But, these are stray cases and largely the tier two IT segment has not seen much of M&A activity. The founder promoters of some of the mid-tier companies ETspoke to do not have any regrets on not cashing out when valuations were rich. Some industry trackers also feel that the decision not to exit may have been the right one.

Sudin Apte, a principal analyst at Forrester Research, says that the mid-size IT vendors have carved a place for themselves in global outsourcing model. “Many clients today are looking to add one or two mid-size IT service providers to their current portfolios.” According to a survey conducted by Forrester, clients think that tier two providers offer lower rates, flexibility in approach and niche capability.

When asked if selling off to bigger players was ever a feasible option, Sudhir Rao, CEO, Bartronics, said it was never an option. “There have been numerous offers as we grew but we quashed them in the initial stages itself,” he says. The Rs 587-crore Bartronics is a Hyderabadbased IT company that offers automatic identification and data capture solutions.

While citing a reason why first generation entrepreneurs never prefer to give up, Mr Rao says that they often feel that the company’s potential has not been exploited fully. “With growth come more opportunities. There is a continuous feeling of ‘we should be able to do more.’”
Mr Menon of Subex shares a similar view. “Five years ago, we were a non-entity in our space. But today, we figure among top 10 global vendors in telecom OSS space. Opportunities still exist to grow further. So, selling out at this point is out of question.”