MindTree and Persistent Systems Represent New Wave of Indian IT Growth

The Indian IT body NASSCOM expects the IT services market in India to grow 11%-14% in 2012. Growth is projected to slow down from the previous year’s rate of 37%. The depreciating rupee has helped Indian outsourcers, which have been able to report higher earnings. But the industry continues to be plagued by the challenges of increasing labor costs, diminishing the benefits of labor cost arbitrage.

According to the TPI Index, over the past 10 years, deals of $100 million or less have tripled in volume. The increasing number of smaller size deals helps mid-tier companies more than the bigger ones as they are face less competition from their larger peers. Analysts believe that to compensate for their scale, the smaller companies like MindTree and Persistent Systems have created a niche for themselves. For instance, MindTree has been developing IP in certain core focus areas. For example, it has developed expertise in Bluetooth technology and is among the top five suppliers for this technology globally with 32 licensing deals, making it a preferred vendor in that space. Persistent Systems has established its strong foothold in the Outsourced Product Development segment, and today, it manages large portions of the software product life cycles for many companies. Analysts believe that growth in the IT sector in India will be driven by these mid-tier companies.

MindTree’s Financials
MindTree’s Q4 revenues grew 22% over the year to $105.04 million, with profits after tax growing 14% over the year to $13.8 million. The company ended the year with revenues up 22% to $402.6 million and profits after tax up 106% over the year to $45.9 million.

MindTree ended the year with more than 235 active customers. It added more than 500 workers during the year to end it with 11,000 employees.

MindTree’s Margin-Improving Initiatives
MindTree postponed wage hikes for its employees by a quarter this year and instead of announcing increments in April is expected to announce them this month. It believes that wages will have to be increased by 8%-9% for offshore employees and between 2% and 3% for overseas employees during the year. Like its bigger competitors, MindTree is looking to counter some of the increase in costs by improving utilization. At present, it operates at utilization rates of 67%-68%, a number it is working hard to improve.

MindTree’s Cloud Initiatives
Earlier this quarter, MindTree partnered with the Netherlands-based KPN. Through the partnership, the two companies will jointly invest in a flexible cloud services aggregator platform for enterprise customers. The new platform will bring together various catalog products, KPN and third-party products, and customer legacy applications on a single platform to deliver them as a service to enterprises globally.

MindTree’s Expanding International Presence
As part of its international expansion, MindTree announced plans to open its first major U.S. development center in Gainesville, Florida. The center is projected to house 400 jobs starting this summer.

MindTree’s stock is trading at Rs 617.70 (~$11.06) with a market capitalization of Rs. 24.82 billion (~$445.73 million). It touched a 52-week high of Rs. 640.50 (~$11.50) earlier this month.

Persistent Systems’ Financials
Persistent Systems’ Q4 revenues grew 15% over the year and 5% over the quarter to $54.20 million. Profits after tax for the quarter grew 19% over the year to $7.40 million.

The company ended the year with revenues growing 22% over the year to $207.39 million, with profits after tax growing 1% over the year to $25.40 million despite effective tax rates increasing from 8% a year ago to 28% for the reported year.

Persistent Systems Expands Internationally
Over the past year, Persistent System has focused on international expansion and opened development centers across the world. It established centers in Grenoble, France, and Kuala Lumpur, Malaysia. In India, it is expanding its capacity by completing the construction of a development center in Hinjawadi, Pune, that will be able to house more than 3,100 employees.

Persistent Systems’ Expanded Collaboration Integration Services
On June 17, Persistent System announced expansion of its Collaboration Integration Services to include full application design and development including both browser-based and open social widgets, HTML5, and mobile device applications. The company believes that the move will help it cater to the growing demand for social applications.

The stock is trading at Rs. 353.50 (~$6.34) with a market capitalization of Rs. 13.59 billion (~$243.64 million). It touched a 52-week high of Rs. 396 (~$7.11) in July 2011.