Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Mid-cap software: At the crossroads? - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Sep 29, 2005

    Mid-cap software: At the crossroads?

    We live in heady times! The markets are literally in stratospheric territory. Foreign Institutional Investors (FIIs) have pumped in over US$ 8 bn into Indian equities this calendar year, economic growth is expected to be robust, inflation and interest rates appear to be benign, affluence is on the rise, corporate profits are growing at an enviable pace despite high crude prices. Simply, all seems hunky dory!

    Undoubtedly, liquidity has played a big role in this rally. Fund managers and research houses alike have been astounded, not just by the rise itself, but also by the pace of the rise. In fact, the Sensex rose from 7,000 to 8,000 in a mere 55 trading sessions and from 8,000 to 8,500 in just eight sessions! A mind-numbing jump by any standards!

    Mid-cap software stocks have certainly had their share of gains in this rally. To put things into perspective, the BSE-Sensex over the past year has gained as much as 54%, while the CNX 500 has also risen by 54%. i-flex solutions, India's premier software products company, has gained 50%, most of it in the last five months, while Geometric Software, a specialist PLM software company, has gained as much as 75%, despite trading subdued of late. Flextronics Software (formerly Hughes Software) has managed to gain a more subdued 21%.

    We give a perspective on the mid-cap software space on a macro basis and fathom as to what lies ahead for these players.

    Testing times
    With offshoring becoming more mainstream, the top players are only getting bigger. They are growing at a fast pace and the gap seems to be increasing between these players and the rest of the pack. In the future, it is more likely that the large clients will go for vendor consolidation and this would only favour the larger players, as they have the scalability to better manage their clients' problems. Even if they lose out on a few clients, due to their more diversified revenue streams, it will not affect them that much.

    However, for the mid-cap players, it is a different story. A lot of them have a greater proportion of business coming from key large clients and if they lose out, it will affect them more. The major differentiator will be skills in a niche area. Companies like i-flex and Geometric score on this count, as they are leaders in their respective fields and entry barriers are high. The next round of consolidation in the industry could see some major shake-ups in the mid-cap space.

    Companies like Geometric, Hexaware and KPIT Cummins Infosystems had all given profit warnings in previous quarters and this has clearly affected sentiment. Concerns about scalability and execution risks are also abounding. Clearly, some of these companies will have to take a call on what they need to do to grow in a sustainable manner over the longer term. They will have to be either merge with or be taken over by larger companies, or will have to take over other mid-sized players themselves. As mentioned above, the key factor will be strengths in a niche area.

    Being gobbled up!
    Even companies with niche skills have been attractive targets for takeovers. Companies like Flextronics Software (formerly Hughes Software, taken over by Flextronics of Singapore, one of the world's leading electronic manufacturing services providers) and i-flex (taken over by Oracle, the world's leading enterprise software company) are telling examples. It thus appears that while the big players will only get bigger and the niche players will either hold their own in their area of expertise or get taken over by large MNC companies, the middle rung companies will be the ones stuck in the middle! They will undoubtedly find it difficult to survive.

    Mid-cap software companies like Polaris, Hexaware and KPIT Cummins have seen difficult times of late. Undoubtedly, the consolidation process will happen, sooner or later. It is not going to be easy to compete against the likes on Infosys, TCS, Wipro, and Satyam et al, companies that have annual revenues between Rs 35 bn to Rs 100 bn. In comparison, KPIT Cummins' FY05 revenues were around Rs 2.5 bn. These companies will either have to merge among themselves or get taken over by larger competitors.

    It is very clear that these companies will have to think out of the box if they want to survive in a highly competitive industry, where geographical barriers do not exist. Therefore, as an investor, one must consider and take a critical look as to why one would want to hold on to these stocks. Possibly the only reason why investors might consider holding on to these stocks is waiting for news of a possible merger with a larger company. But then, this would amount to speculation and not investing. Therefore, we believe that investors will find more value in larger companies or niche players for a long-term investment horizon.



    Equitymaster requests your view! Post a comment on "Mid-cap software: At the crossroads?". Click here!


    More Views on News

    Tech Mahindra: Our Revised View (Quarterly Results Update - Detailed)

    Aug 2, 2017

    A better than expected turnaround in performance results in a change in view.

    Wipro: A Decent Start to the Year (Quarterly Results Update - Detailed)

    Jul 27, 2017

    Digital services drive growth for Wipro in 1QFY18.

    Infosys: A Decent Start to FY18 (Quarterly Results Update - Detailed)

    Jul 14, 2017

    Infosys starts FY18 on an encouraging note with a stable performance.

    Ankit Shah's First Five Insider Recommendations (The 5 Minute Wrapup)

    Aug 5, 2017

    How to get exclusive insider recommendations from Ankit Shah.

    TCS: Currency Volatility Plays Spoilsport (Quarterly Results Update - Detailed)

    Jul 14, 2017

    TCS starts FY18 decently despite an adverse currency impact.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    Proxy Plays: A Smart Way to Bet on 'Off Limits' Companies(The 5 Minute Wrapup)

    Aug 4, 2017

    The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE IT

    Aug 17, 2017 (Close)