Mphasis, Coforge shine in strong Q2 for IT midcaps while Sonata faces seasonal headwinds

Summary

Mid-sized IT firms delivered mixed Q2 results amid macro headwinds, with Mphasis and Coforge posting strong growth while Sonata faced seasonal pressures.

Mphasis Ltd capped a strong outing in the second quarter for India's mid-sized tech services companies, which were undeterred by an uncertain demand environment and cautious client spending.

However, the exception was Sonata Software, which reported revenue of $256 million on Friday, a 26% drop from the previous quarter. The second quarter is seasonally weak for Sonata's domestic business, which primarily involves selling software licences and makes up about three-fifths of the company's overall revenue. Fewer software licences are sold during the quarter.

A day earlier, Blackstone-owned Mphasis reported its best second quarter in five years with a 3.2% sequential increase in revenue to $486 million in the July-September period. Almost three-fourths of its incremental revenue came from financial institutions, which account for more than half of the company's overall business.

The two companies capped the earnings season for India's mid-sized tech services firms with annual revenues of $1 billion to $4 billion. Coforge Ltd was the fastest-growing tech services firm in Q2 while Hexaware Technologies Ltd was the slowest.

The two companies capped the earnings season for India's mid-sized tech services firms with annual revenues of $1 billion to $4 billion. Coforge Ltd was the fastest-growing tech services firm in Q2 while Hexaware Technologies Ltd was the slowest.

In terms of revenue growth, Coforge reported a 10.1% increase to $652 million in Q2, followed by Persistent Systems Ltd (up 7.8% to $488 million), Firstsource Solutions Ltd (up 2.8% to $296 million) and Hexaware Technologies (up 1.6% to $412 million).

Coforge and Firstsource Solutions reported their best second-quarter performance in two years, while Persistent Systems, the ninth-largest tech services company, reported its best second-quarter performance in five years.

This contrasts with the country's Big Six-Tata Consultancy Services Ltd, Infosys Ltd, HCL Technologies Ltd, Wipro Ltd, Tech Mahindra Ltd, and LTM Ltd-which did not post revenue growth of more than 2% from the preceding quarter. Wipro, the fourth largest, was the only one among the top 12 to report a sequential revenue decline in the quarter.

Upper hand

However, the Big Six had the upper hand in terms of profitability, save for Infosys, the second-largest IT company, whose operating margin fell 10 basis points, and TCS, whose margin remained unchanged. Each of the other four tech services companies widened their operating margins by up to 130 basis points.

Among the midcaps, operating margins remained unchanged at Coforge (16%) and Mphasis (14.8%) while they fell 100 basis points to 15% for Persistent Systems and 140 basis points to 12.2% for Hexaware Technologies. Sonata Software's margin jumped 180 basis points to 7.3%, and Firstsource Solutions' margin rose 10 basis points to 12.5%.

"Hexaware's growth has been lower than management's expectations in YTD-CY26 due to delay and/or reduction in spending in vendor consolidation deals and leadership changes at client's end," ICICI Securities analysts Ruchi Mukhija, Aditi Patil and Seema Nayak said in a note dated 30 October.

According to Vikas Swami, an equity research associate at InCred Equities, Coforge would have to ensure deal uptake to maintain growth.

"The strong order book reflects management's proactive focus on large deals and provides healthy revenue visibility. However, sustaining $1bn+ quarterly order intake remains key to maintaining the current growth trajectory," Swami said.

Coforge increased its full-year margin guidance by 50 basis points to 16% even as the rise of AI increases price wars among peers.

"This improvement in margin, at a time when our industry faces acute pricing pressure, is driven by our execution ethos," Sudhir Singh, chief executive officer (CEO) of Coforge, said during a post-earnings conference call on 23 October. "AI is breaking the link between scale and margin leadership for the tech services industry. Time and material, effort-based economics face pressure as automation reduces labor content."

The sector has faced uncertain demand due to geopolitical tensions in West Asia and the spectre of artificial intelligence, which threatens to eat into the work done by the country's largest IT services firms.

H1 report card

The uncertainty was reflected in the first-half report card of the midcaps, even though they had a promising second quarter. In the first six months of the fiscal, the midcaps grew in a range of 2% to 37% compared with 6% to 40% growth in the first six months of the preceding fiscal. However, this was better than their larger peers, which grew 0.5-6.5% in the first half.

For now, the mid-cap tech companies are not disturbed by this lingering demand uncertainty.

"We now expect revenue growth in the low double-digits range for the full year," Nitin Rakesh, chief executive officer of Mphasis, said during the post-earnings analyst call on 6 November. "Last quarter, our guidance was high single digit to low double digits. We are doing so despite an uncertain macro environment because it rests on results already delivered and on visibility we can see in the pipeline and the backlog."

Still, shareholders were not convinced. Shares of three of the midcaps closed lower a day after they announced their earnings. Shares of Persistent, Hexaware and Firstsource fell 1.7%, 5.9%, and 4.4% a day after they announced their September quarter earnings. Coforge was the outlier as its shares jumped 4.9%.

On Friday, Mphasis and Sonata Software shares closed 0.6% and 0.9% lower on the BSE.