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Credit rating agency CRISIL said in a report that it expects consolidation among Tier-II information technology (IT) services firms (annual revenues of Rs 1,000-10,000 crore) to gather pace over the medium term, as they strive to achieve scale and build digital capabilities to stay relevant.
This comes at a time when their legacy businesses – such as time and material contracts – have already become commoditised, posing significant growth and profitability challenges.
According to the report, another trend that’s also being witnessed is the exit of promoters of Tier-II firms, capitalising on higher valuations in the past two years and better growth prospects.
CRISIL’s analysis of the top 22 listed IT service firms shows there is a potential consolidation opportunity among Tier-II firms, which today have a combined market capitalisation of ~Rs 33,000 crore. Pertinently, consolidation moves worth Rs 18,000 crore are already in progress among Tier-II firms.
"Such consolidation engenders manifold synergies, boosts profitability and builds capabilities to cope with opportunities in the digital space," the report said.
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