Pureplay and vertically focussed IT services firms in niche segments are seeing continued demand, have a brighter outlook for the year, and are faring better than larger peers in the industry, given the niche vertical focus and low base effect. 

Companies in the space have niche specialisations, such as KPIT Technologies, which is a software integration partner to the automotive and mobility ecosystem, L&T Technology Services (LTTS), and Tata Elxsi, are pure-play Engineering Research (ER&D) services companies. 

KPIT Technologies in Q1 reported a 56.9 per cent year-on-year (y-o-y) rise in profits at ₹134.4 crore. Revenues, too, jumped 51 per cent. Kishor Patil, co-founder, CEO, and MD of KPIT Technologies, said: “Opportunities remain stronger as mobility players continue to invest in new technologies in the areas of electrification, vehicle autonomy, connectivity, and personalisation.” 

Similarly, Tata Elxsi, which reported a marginal 2 per cent y-o-y increase in net profit at ₹189 crore, remained largely optimistic in the outlook for majority of its verticals. Manoj Raghavan, CEO, Tata Elxsi, in an analyst call, said: “As we step into the second quarter of this financial year, the strong deal pipeline, especially in automotive, healthcare, and design businesses, provide us the confidence and foundation for accelerating our growth throughout the year. (sic)”

Kumar Rakesh, Analyst, IT & Auto, BNP Paribas India, said: “A lot of decoupling across geography and verticals is being seen. Hence, if a company is aligned with the vertical or geography, which has completely decoupled from the macros, they would perform better.” He notes the automotive industry as an example, which is making structural spending, irrespective of macros, given their focus on the transition to electric vehicles. 

Analysts also note that demand for certain companies is strong because of the nature of the work. Sumit Pokharna, Research Analyst & Vice-President at Kotak Securities Ltd, said: “The projects undertaken by companies like KPIT can’t be stopped in between, hence, the demand is strong. Although comparison with larger peers isn’t completely fair, unlike them, the large companies are into digital transformation, which is prone to be stopped or postponed.” 

low base effect

He also notes that the low base effect, given the current size of the business, helps them fare better. While the base effect is an advantage, Rakesh also points out that given the reduction in average deal sizes post-Covid, many smaller companies which weren’t qualified to participate earlier, are now qualifying, opening up more opportunities. 

comment COMMENT NOW