Tech Budget of 2013 & its Impact on the Midsized IT Firms

The year 2013 brings in a sign of worry for the Indian midsized IT firms. After a year of fast growth which was better than the large cap companies, India’s medium-sized software services exporters are looking at a tougher, slower year ahead. The companies despite waiting for economic revival in their largest market, the United States does not see a profitable year ahead.

If we talk about the year 2012, companies such as Hexaware of Mumbai, Infotech of Hyderabad, KPIT Cummins of Pune gave a tough competition to the Indian biggies like Infosys, Wipro etc.

Future of Midsized IT Firms in 2013

But looking ahead in future we see that the clients are losing confidence about their technological expenditure and are taking longer than usual to finalize IT budgets. It is expected that the year 2013 will be slower in sectors such as financial services and BPO, where the pace of decline is likely to continue and thus the midsized IT companies will experience a setback in the year ahead.

Hexaware Technologies which has a sales figure of over $370 million expects the year to be “more muted”. The newer technologies like the cloud computing, data analytics etc. are some of the key areas focused by the IT companies these days, but owing to the presence of large rivals, a clear competitive advantage is missing in the area. This leads to a slow profit generation for midsize companies like Hexaware.

In an interview recently Infotech chairman and managing director BVR Mohan Reddy said that there was a considerable delay in the finalizing of the budget from the clients end this year, which normally gets over by November mid week. Also a delay was seen in sending the purchase orders from the large companies, which very well shows the sign of a sluggish growth in the economy. The average industry growth is expected around 14-15%, thanks to the biggies operating the sectors. If we talk about companies like Mindtree based out of Bangalore, we see that the growth would be slow and would be less than the expected industry average.

Read more about Top Information Technology (IT), Hardware and Software Companies in India Categorized by Tiers.

Challenges faced by Midsized IT firms

It is needless to say that unlike large IT services providers that provide services across different verticals, midsized firms have a narrower portfolio of services as they operate in niche segments catering to banking, manufacturing or engineering industries.  It is expected that the debt crisis in the west will impact the client firms of the mid size companies which will put a stop to such high growth in the mid-cap IT firms in India in the year ahead. Factors such as demand pressure, rising attrition rates and limited bench sizes could restrict profits of mid-tier firms in the coming quarters.

It was seen that despite recent strong growth, the structural limitations of the business model like Limited pricing power, volatility in margins and high client concentration of a mid-tier company remain unchanged, which would lead to a poor performance in the year 2013. Also problems such as currency volatility, domestic policy paralysis, lower spend on IT in the US and UK are some of the biggest challenges which will be faced by these companies.

Stock Analysis of The Midsized IT firms

The Indian midsized IT firms outperformed in the recent past, as their main market based out of US and Europe got them heavy business. The corporations in the US and Europe opted to give out smaller technology contracts of shorter duration to such mid-sized companies, thus placing at a better position to compete. The out-performance by these companies forced the investors to put in their money in these mid-sized IT companies as a potential investment choice, after withdrawing a considerable amount of investment from the large-cap stocks.

Thus to conclude I can say that a mid-cap firm will naturally face problems of scale because large companies can offer the same services at a higher scale thus eating up your prospect sale and profit in the end. The year is really going to be a challenging year for mid cap IT companies.