Midcap IT firms like Sonata Software, Coforge, Mphasis, and Persistent Systems continue to outperform their larger peers in terms of revenue growth despite continued pressures on deal delays and sector-specific softness.
On an average the top domestic IT services companies including – Tata Consultancy Services, Infosys, and Wipro – reported a 1-2% revenue growth on a sequential basis during the April-June quarter, while the midcap IT firms expanded by 4-5% on a sequential average.
While their growth remained in the upward trajectory, the management maintained their cautious outlook for fiscal 2025 due to continued macroeconomic disruptions such as higher interest rates in the US, the region which they cater to the most.
Revenue and Profit Growth
Firms such as Sonata Software, Coforge and Persistent Systems reported a higher sequential revenue growth, while others like Mphasis had a more muted performance. But, most of their bottomline fell quarter-on-quarter due to acquisition costs, higher interest rates, and an increase in H-1B visa applications.
Sonata Software led the growth among its midcap peers, by posting a robust 15% sequential revenue increase, reaching Rs 2,527.43 crore in the June quarter. However, its net profit dipped slightly mainly due to higher tax and interest costs.
Despite the decline, Sonata’s CFO Jagannathan Chakravarthi Narasimhan highlighted the company’s growth prospects, particularly in the GenAI and AI space, where the company is has started to witness transformative deals.
This growth was followed by Persistent Systems. The company reported a 5.7% sequential revenue growth to Rs 2,737.17 crore, driven by strong performances in the healthcare and BFSI segments. But, the company faced a 2.8% decline in net profit due to increased subcontracting costs, a rise in H-1B visa applications, and higher administrative expenses.
Coforge, on the other hand, reported a modest sequential revenue increase of nearly 2% to Rs 2,400.8 crore in Q1 FY25. However, the company experienced a significant 40.5% drop in net profit, falling to Rs 133.2 crore, largely due to a one-time expense related to its acquisition of a stake in Cigniti Technologies.
Meanwhile, Mphasis saw a near flat revenue growth of 0.2% sequentially, bringing its total revenue to Rs 3,422 crore. Despite the sluggish revenue growth, Mphasis managed to expand its bottomline by nearly 3%, buoyed by improved margins.
Margin Performance
Margins were under pressure for most midcap IT companies due to various factors, including acquisitions, increased costs, and strategic investments in artificial intelligence.
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 basis points by FY27, driven by the benefits of the Cigniti acquisition. This acquisition, intended to propel Coforge toward becoming a $2 billion company by FY27.
Persistent Systems also faced a 50 basis points margin compression in the June quarter due to subcontracting costs, visa fees, and increased sales and administration expenses. However, the company’s increased utilisation and operational efficiencies helped offset some of these costs.
Meanwhile, Sonata Software reported an increase of 140 basis points in Ebitda margins, despite the challenges posed by higher tax and interest costs. However, the company is seeing a delay in large deal closures, which has impacted margins.
Further, Mphasis managed to improve its operating margin by 10 basis points to 15%, and is confident in meeting its FY25 margin guidance of 14.6-16%.
Deal Wins and Strategic Focus
Deal wins remained buoyant across these companies aided by a bounce back in discretionary spending in the US, especially in the BFSI segment, which is also a trend that was seen in their larger IT peers.
Coforge reported a strong executable order book of $1.07 billion, up 19.3% year-on-year, setting the stage for continued growth. The company’s acquisition of Cigniti is expected to enhance its service offerings and drive revenue growth, although the immediate impact on profitability has been negative.
Mphasis secured new total contract value (TCV) wins of $319 million, a significant increase from the $177 million recorded in the previous quarter. Notably, 84% of these wins were in new-generation services, underscoring the company’s strategic focus on AI-enabled platforms.
Persistent Systems achieved order bookings of $462.8 million in TCV, with a particular focus on the healthcare and BFSI segments. And Sonata Software said its total deal pipeline now consists of 47% of large deals, while 37% of it are with Fortune 500 clients.
Vertical and Geographic Performance
In terms of verticals, Mphasis saw a 1.1% year-on-year growth in the Banking and Financial Services (BFSI) sector. Further the US market remains a stronghold for the company, particularly in enterprise AI adoption, with the banking sector leading the charge, the company’s management said.
Persistent Systems reported a strong 16.5% growth in its healthcare and life sciences segment and a 5.9% increase in the BFSI sector. The company also crossed the $100 million mark in the BFSI segment for the first time, highlighting its growing presence in this critical vertical.
Sonata Software’s TMT, healthcare, and BFSI sectors performed well, with the company expressing optimism about continued growth in these areas. However, the company noted that large BFSI customers in its newly acquired Quant Systems had shown some softness, impacting growth in this segment.