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Turn of the mid caps

Mid-sized technology companies have reported higher earnings growth than their larger peers


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Turn of the mid caps technology

Mid-size technology companies are back with a vengeance, reporting higher earnings growth than their larger peers. All of the big players of the technology sector have reported single-digit EBITDA growth in this period - Infosys was the highest with 8 per cent EBITDA growth (TTM), followed by Wipro, which saw earnings grow 6 per cent; the industry leader TCS reported flat EBITDA growth (TTM). Here are two companies with top earnings growth in the technology space.

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Tata Elxsi Embedded growth

Tata Elxsi has sales close to R1,000 crore (TTM) and market capitalisation of R5,600 crore. It derives the majority of its revenues (94 per cent) from the software division. Within the software vertical, embedded software constitutes 81 per cent to the total revenues. Within this vertical are three main revenue sources: automotive, which brings in 40 per cent of embedded revenues; broadcast, which brings in 35 per cent; and communications, which brings in 25 per cent of revenues. The automotive segment is set to gain from higher electronic usage in vehicles - up from 2 per cent of the total value of the car in 2000 to 15 per cent at present. This is expected to go up to 20 per cent by 2020. The broadcast segment is expected to gain from increasing services from operators.

The next growth drivers include the 'internet of things' space that aims to connect everyday devices and make them smart. These include smart appliances like smart TVs, smart homes, smart transportation, etc . Tata Elxsi is expected to post annual revenue growth of 26 per cent CAGR and PAT growth of 43 per cent CAGR, respectively, over FY15-17 (Motilal Oswal estimates).

Mindtree Digital gains

Giving Tata Elxsi company in the race for the highest earnings growth is Mindtree, another mid-cap firm with revenues of R3,561 crore (FY15).

Mindtree's top verticals include hi-tech and media, manufacturing, consumer-packaged goods (CPG) and retail, and BFSI, which together account for 75 per cent of the revenues. Manufacturing and BFSI reported growth of 8.7 per cent and 9 per cent, respectively, in the latest quarter (Q2). Hi-tech, the biggest vertical, which brings in 30 per cent of revenue, grew at a strong 11.6 per cent - fastest since the first quarter of FY14.

What is catapulting Mindtree ahead of its peers is the outperformance of its digital vertical, which constitutes 36 per cent of the company's revenues and is currently growing at 9.6 per cent (YoY). In the latest quarter (Q2), digital accounted for half of the company's orders and also witnessed doubling of their sizes.

Mindtree's management has guided that it will beat Nasscom industry revenue guidance of 12-14 per cent this year. According to ICICI Securities, Mindtree is likely to report revenue and PAT growth of 22 per cent and 23 per cent, respectively, between FY15 and FY17.

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