‘A million dollars isn’t cool, you know what’s cool? A billion dollars!’ This iconic quote from Sean Parker to Mark Zuckerberg, in the movie Social networks, underscoring the importance of a billion dollars in the corporate world. Needless to say, this is also good for Indian corporations. A billion dollars is a milestone whether in terms of market value or revenue or profit.
Recently, three mid-cap IT companies — Coforge, Continuity System And L&T Technology Services (LTTS) — hit this annual revenue milestone when it announced its fiscal 2023 fourth quarter results. How cool is that? Please rate.
The original $1-b club
Infosys pass one billion dollars in revenue in fiscal 2004 and so did the IT services business of close peer company Wipro. TCS, then unlisted, passed this milestone a year earlier in fiscal 2003. HCL Tech followed suit in 2006. Thus, by 2006, the Big Four of Indian IT majors were pass this milestone. India’s fifth largest IT company at the time, Tech Mahindra (now surpassed by LTIMindtree after the merger), passed this milestone in 2011.
How great is this company after passing a billion dollars in sales?
With the exception of Wipro, the margins are pretty good. For example, TCS has delivered a CAGR (since listing) return of 19% compared to a Nifty 50 return of 14%. Tech Mahindra stock has delivered an annualized return of 16%, outperforming the Nifty 50’s CAGR of 10%.
Outstanding HCL Tech even so, with a stock CAGR of 18%, significantly outperforming the Nifty 50 CAGR of 11%. Wipro alone performed 50 worse than Nifty back from the moment it crossed billion dollars in sales.
THEN vs NOW
Compared to these, what can one expect from new entrants? Maybe not that cool?
While exactly how the future will play out is anyone’s guess, there are reasons to believe that profits from new entrants may not match members’ past returns. The original of the billion dollar club.
First is, TCSInfosys , HCL Tech and Mahindra technology All traded much cheaper than Coforge, Peristent Systems, and LTTS at their respective times when they crossed the billion-dollar mark. At the time, a company that was trading on par with today’s new entrants, Wipro, was underperforming.
Many. The best headwinds for the industry are probably behind them. Before that, India’s IT services industry was a hot emerging industry. India’s software and services sector grew by nearly 30% in FY 2004. Compared to FY 2023, the Indian technology sector is likely to post 8.4% growth, according to initial estimates. head of Nasscom.
While some mid-cap companies like Persistent Systems and Coforge also enjoyed strong revenue growth, going forward they may lack the support of industry headwinds or growth phases. Strong global economy 2004-2007, considered one of the best periods of the global economy since World War II.
Profitability is also much higher then with net margins mostly in the teen to low percentage range in their 20s. New entrants net margins are much lower, in the percentage range from one digit high to two digits low.
Lower margins indicate a high intensity of competition in the industry. With many players upping their game over the past two decades, there is a large pool of quality companies vying for the same piece of cake. As a result, the profit margin may not be as high as it used to be. In fact, it’s the Big Four players themselves that have seen margins shrink over the past two decades, even though they’re still better than mid-cap companies. Ironically, margins have shrunk as during the same period the rupee depreciated from about ₹40 to a dollar then to about ₹80 today.