The middle path to growth

YEAR AFTER YEAR IGATE bought out Patni Computer Systems, it finds itself on the verge of bagging two mega orders—one each in Europe and the U.S., priced at between $200 million (Rs 1,048.6 crore) and $300 million. “Neither Patni nor iGate has seen deals like this in the past,” says Phaneesh Murthy, CEO of iGate Patni.

For over five years, mid-size IT firms such as iGate and MindTree have struggled to reach the coveted $500 million mark in annual revenue; that number is a critical milestone for young firms to stand out from the rest. Between 2007 and 2010, iGate clocked an average turnover of $223.6 million; MindTree managed $216.3 million. However, last year, MindTree grew 22% to touch $403 million in revenue without an acquisition.

While large IT players such as Infosys or Wipro stru­ggle for growth, the time is right for mid-size players to grab orders. “Over the last few quarters, growth rates of mid-size IT companies have been higher than their larger counterparts,” says Dipen Shah, head of fundamental research, Kotak Securities.

When large companies let go of clients because they may be unprofitable in the biggies’ scheme of things, the rung below benefits. “The larger deals are getting broken up in the range of $25 million to $50 million, which is our sweet spot,” says Anjan Lahiri, president, MindTree IT services. The number of MindTree’s $10 million deals went up from one in FY11 to seven in FY12, while its $20 million deals went up from three to four. That said, both MindTree and iGate dropped over 40 clients each last year from their books. “These clients contributed little to profits and dipped our revenues overall because they delayed projects of larger customers,” Murthy explains. This move has also helped improve profits, as it has breached $1 billion in revenue after the Patni buyout.

But where will growth come from? “Whether a company is $1 billion or not hardly matters. It needs to have the sales engine,” says Sridhar Vedala, CEO of QS Advisory, a global sourcing advisory for customers in Europe. The way forward in a tight market will be through acquisitions. Shah cites HCL Technologies’ buyout of the Axon Group in Britain in late 2008 and Zensar Technologies’ buyout of Akibia in late 2010. In both cases, the acquirer had access to clients when recession made it harder to grow organically. HCL has just begun clocking $1 billion every quarter, as it signs on new clients.

Even iGate has more than 300 clients after the acquisition. “The way the market senses us is different. I am biased towards innovation, but clients buy on the basis of scale and size,” says Murthy. As a larger entity, iGate added 65 clients in 2011, of which 19 feature on Fortune’s list of the top 1,000 U.S. companies.