CFO Bridge Insights May 2023

US $ 1+ Billion dream

Launch of this Tech SME Bridge Newsletter

Introduction: 

Tech SME Bridge is a platform designed to provide insightful analysis and actionable intent for SMEs, MSMEs, and businesses across industries, helping them navigate benchmarks and tackle challenges commonly encountered in the IT sector. With a keen focus on addressing real-world issues faced by businesses, Tech SME Bridge aims to empower decision-makers with data-driven perspectives and industry expertise. This in-depth analysis is authored by Subramanian Gopalakrishnan, a seasoned CFO Partner based in Delhi, whose experience and strategic acumen offer valuable guidance to business leaders seeking to optimize their operations and achieve sustainable growth.

• We at CFO Bridge are extremely delighted to start our first Tech SME Bridge Newsletter to share our knowledge and inferences from the public domain information to help various stakeholders in  the Tech Sector.  

• Our attempt would be to draw the insights from “Goliaths (Top 5 IT players)” by doing the inter firm comparison and share it widely so that the “David’s (next 25 & beyond players)” can benefit. We will also do comparatives for a chosen next 25 players based on data availability as well.  

• Our focus would be to help SMEs take right referenceable benchmarks in their Revenue  Maximization / Profit maximization / Cost optimization or rationalization journey which is the  current need of the hour for the IT industry to tide over FY24 challenges.  

• We will try to cover various P&L and other Financial/ operational metrics, their interplay and ideas around how to improve and bring focus or thrust in the value creation journey.

• We would also like to lay a specific emphasis that this newsletter is not intended to be a stock  investment research advise, rather a research done purely to bring out strategic options which can be explored or adopted by organizations, clients and subscribers for growth or operational improvements or any business transformation agenda which they may like to drive using own  discretion. 

We value your feedback and comments, so please feel free to write to us.

IT company’s dream: US $ 1 Billion 

It is every IT company’s aspiration to reach the $1 Billion mark. In FY23, 3 companies made it to  the $1+ Billion revenue elite league. This article talks about these companies and the next few companies who can make it to the list in the next 5 years. 

• TOP 3 companies are adding $1 to $2 Billion on a larger revenue base. 

• Infosys has guided to grow at 4-7% in FY24 and HCL Tech at 6-8% in FY24, if they touch the upper end of the guidance, they will add another $1 Billion to their baseline of FY23.

Note : L&T Technology Services crossed annualized revenue of $1 Billion in Q4.FY23.

US $ 1 Billion dream accomplished in FY23

• Persistent–Exit Revenue annualized is $1096 M (YOY –6%), if they continue sequential growth of 3%, they will touch YOY 14% growth, while the company has not given specific revenue guidance.

• CoForge -Exit Revenue annualized is $1056 M (YOY -- 5.4%),while the company has given guidance of 13-16% YOY. Given the order book on hand, they seem to have upside and can overachieve. They are aspiring for $2 Billion in near term as per their analyst call.

• LTTS–Exit Revenue annualized is $1020 M (YOY –3%). Company guides Organic growth of 10% and 20% including inorganic growth in their analyst call. The company is aspiring to reach a run rate(RR) of $1.5 B by FY25 which means 20% growth in FY24 and another 25% growth in the exit quarter will help to reach $1.5B.

Despite COVID playing spoil sport, from the above data we have observed that Persistent and CoForge grew  almost $0.5 Billion over the past 4 years.  

Next few IT companies aspiring for US $ 1+ Billion  

• We chose the next few companies in the pecking order as next level aspirants and our views.  

• Cyient–If the same YOY 20% growth is happening by end of FY25 they will cross US $1 Billion

• KPIT –Is showing a good growth order book, at same run rate can touch US $1 B by FY27

• Other companies –Birla soft, Zensar, Tata Elxsieven if they gallop at a high rate need 5 years.

• Other alternates which can happen would be inorganic growth or mergers if there are synergies.

Client Concentration & Client Mix – a comparative

Observation and Ideas to leverage : 

• Opening more $1M+ clients/logos and mining them to grow further to $5M+ and above is the key. Sales  incentive schemes should promote opening new logos for the field sales force and client engagement team  leaders should have a target to mine / grow accounts as they build relationships.  

• One can draw clear inferences from the below table on how to grow the client count in various revenue size  categories to reach next level and at the same time know the need to lower the client concentration risk  

Over dependence on few clients is a clear risk which needs mitigation else, should the client exit or if a sector in which the client operates runs into a problem the company can have degrowth or lopsided growth as well. Investors prefer stable growth companies.

Date source : As per investor presentation , transcripts of respective companies