Several mid-tier information technology (IT) companies are scaling back on client additions as they shift focus towards prioritising margins amid continued weakness in discretionary spending. This marks a significant shift from the aggressive client acquisition that was previously employed to boost revenues.
Data from recent quarters highlight a noticeable reduction in client additions across notable mid-tier IT firms such as Cyient, Mphasis and Coforge.
Cyient saw its new client addition numbers decline from 20 in Q1FY24 to 11 in Q1FY25, while it remained flat on a sequential basis.
Mphasis reported a drop from four new client addition in Q1FY24 to two in the June quarter this year. On a quarter-on-quarter basis, it was flat.
“Post-Covid, there was a strong shift towards digitisation, leading mid-tier IT companies onboard any clients that came their way to boost revenues. However, this began to dent their margins, and over the last few quarters, there has been a shift towards a stable client base. So now, when revenue growth is also becoming a problem, there’s no point in them adding somebody who’s out of Fortune 2,500 or 3,200. They will definitely want to put a filter to ensure margin and profit growth,” an analyst from a domestic broking firm told FE.
Negating the trend, Coforge added four new clients on a year-on-year basis in the quarter ended June. However, the company’s client revenue concentration from its top 10 clients has declined to 32.9% in Q1 from 35.5% in FY23 and 45.3% in FY17.
In its investor presentation, Coforge said, “De-risk operating profile with declining client concentration while increasing large account relationships,” suggesting a deliberate shift towards a more diversified and stable client base.
With the decline in discretionary spending, revenue growth has also started to taper off, prompting these companies to focus more on margin preservation. This shift is evident in the operational strategies of not just these companies, but also even larger IT companies, where maintaining or even improving profit margins has taken precedence over rapid growth.
In the June quarter, margins were under pressure for most mid-cap IT companies due to various factors, including acquisitions, increased costs, and strategic investments in artificial intelligence (AI).
Coforge’s operating margin declined by 110 basis points sequentially to 17.9%, primarily due to acquisition-related expenses. Despite this, the company remains optimistic about improving margins by 150-200 bps by FY27, driven by the benefits of the Cigniti acquisition.
Persistent Systems also faced a 50 bps margin compression in the June quarter due to subcontracting costs, visa fees, and increased sales and administration expenses.
However, Mphasis managed to improve its operating margin by 10 bps to 15%, even though its revenue growth was flat on a sequential basis. “We are cautiously optimistic about continued improvement in our core markets,” said Nitin Rakesh, CEO, Mphasis.
From: financialexpress
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