IT midcaps witness BFSI-led growth as larger peers take a hit

At a time when large IT companies are seeing BFSI (banking, financial services and insurance) vertical-led softness, the same is aiding the growth of some midcap companies. The reason: smaller IT firms cannibalising the BFSI revenue of larger companies.

Companies such as Sonata Software, Coforge and Birlasoft have been witnessing growth driven by the BFSI vertical. For instance, Sonata’s revenue, which used to derive 7% from BFSI two quarters ago, is now deriving three times more at 21% of its revenue. Its fourth-largest vertical two quarters ago, BFSI has become its third-largest vertical in Q2FY24.

Similarly, Coforge which used to derive around 26% of its revenue from the BFSI sector a few quarters ago, is now getting more than 31% from the same sector in the overall revenue mix.

During a recent earnings call, Samir Dhir, CEO and MD, Sonata Software, said: “In the banking space, we are taking market share due to continued focus on data privacy, which was an offering we got through Quant acquisition.”

“We are pursuing several large programmes where clients want to drive rapid digitisation for the consumer-facing applications and offerings. We are very bullish about our positioning in the banking space where we continue to take market share away from generation-one companies,” he added.

Peter Bendor-Samuel, CEO, Everest Group, said: “Midcaps are going after a different part of the market — the regional banks. In general, the large firms have huge estates in the large banks and BFSI clients.”

Large banks are under pressure as they shrink or fail to grow and this puts pressure on the BFSI portfolio of IT companies as there is not enough work in the regional banks and small BFSI institutions to offset the slowdown in their core clients. The midcaps don’t face this issue.

Peter said there is also significant customer dissatisfaction that has emerged with large IPPs (Indian Pure Play) and this is opening the door for the smallcap firms.

He further said: “The largecaps have a lot of business with the big banks. The big banks were the first to outsource and have more work. The smaller banks are newer and often prefer smallcaps. However, the large banks also serve them. And the smallcaps tend to be in niche areas even with the large banks.”

The small banks favour smallcaps most of the time, but even if the large caps do well with the smaller banks, it does not offset the contraction in the large banks’ portfolio of IT firms as that book of business is quite large.