As the earnings season for the first quarter of fiscal year 2022 comes to a close, mid-cap IT companies emerged as out-performers compared to the top six large-cap IT companies by nearly 2.3 per cent in overall quarterly revenue growth Y-o-Y.

The top tier IT companies saw consolidated revenue growth of 18.9 per cent compared to mid-cap companies, which reported 21.2 per cent revenue growth Y-o-Y.

The top six large-cap IT companies clocked a total revenue of $21,039 million in Q1FY22 against $17,692 million in Q1FY21. Mid-cap companies, which include Mindtree, Mphasis, LTI, LTTS, Persistent Systems, and Coforge, reported $2,319 million in revenue for Q1FY22 and $1,912 million in Q1FY21, according to data compiled by Emkay Research.

“The mid-cap companies posted very strong revenue growth rate. TCS has been a disappointment but most larger companies posted a dollar-revenue growth of 4-4.5 per cent organically. In contrast, the dollar-revenue organic growth rate for some of the mid-cap companies has been around 7-9 per cent,” Jyoti Roy, DVP-Equity Strategist, Angel Broking, told BusinessLine.

Probable causes

Analysts at Emkay Research said, “Tier 2 companies outperformed tier 1 peers in sequential revenue growth but their margins faced high supply-side pressure compared to their tier 1 peers. We expect supply-side pressure to persist for the next 2-4 quarters and ease out gradually with strong fresher hiring.”

Covid as an enabler

Vahishta Unwalla, Lead Analyst - Industry Research, Care Ratings, sees Covid as a key enabler. “The mid-tier IT companies have shown superior results in Q1FY22. Covid has been one of the main enablers. Most of these companies have a strong presence in emerging markets and growing industry verticals. Vendor consolidation also helped mid-tier companies gain market share from IT majors,” she told BusinessLine.

According to Roy, the book-to-bill rations for mid-cap IT companies have been much stronger than the large cap counterparts.

“Most of these mid-cap companies are now in a sweet spot of billion-dollar top-line category. Given this size, they have been able to win some of the medium to large-size deals as well. Order intake for the mid-cap companies have been very strong,” he said.

Given the demand for emerging technologies such as cloud, data analytics, digital transformation, cybersecurity and AI, the trend is here to stay. Unwalla believes reskilling of employees in newer technologies will continue and will act as a key differentiator.

“Over the next three years, we are expecting significantly higher growth rates for the industry.

“However, large-cap companies, because of the sheer size, won’t grow as much. Mid-cap companies, given the order book they grew in the last two-three quarters and hence robust pipeline, these companies will continue to grow at a much faster rate than the large cap IT players at least for the next two years,” Roy added.