Bleak tech spend hits deals space in IT sector

Bengaluru Deal activity in the global technology landscape remains muted with no improvement seen from the last quarter as clients remain cautious on new spends.

Though several large deals have been bagged in the April-June quarter by big IT firms, the deal flow in the small and medium outsourcing contracts remain tepid as per brokerage firms and industry experts.

“There is higher level of scrutiny around each deal due to which pipeline to conversion is taking longer than usual and in certain cases order book to revenue conversion is also slow,” ICICI Securities wrote in a note.

In the last quarter, however, number of large deals came in the way of big firms. In May, Infosys won a mega deal worth around $1.5 billion from global energy company BP, spread over five years. This was the second biggest deal for the Bengaluru-headquarteredfirm which last won a $3.2 billion contract from German automotive major, Daimler. In June, company has bagged a $454-million deal from Denmark’s Danske Bank.

Similarly, TCS won a large deal from National Employment Savings Trust, UK’s largest workplace pension scheme worth GBP 840 million ($1.1 billion), spread over an initial tenure of 10 years. Till so far this year, TCS has won four large deals, which include a $723-million deal from insurer Phoenix Group, the Marks & Spencer deal and the 10-year contract with the Teacher’s Pension Scheme in England and Wales.

Though these large deal wins are going to inflate the overall deal pipeline of many companies for the April-June quarter, overall deal conversion is expected to be subdued with very less revenue accretion.

“We expect growth to be down this year. As an industry we see the growth dropping from 13 per cent last year to 3-4 per cent this year. The large deals will help accelerate the growth of the firms which capture them, but even these firms will be substantially down in this difficult macro environment,” Peter Bendor- Samuel, CEO of global consultancy firm, Everest Group told Bizz Buzz.

Sources in the know said that project cancellations and sluggish deal flow would impact the total contract value of many mid-tier firms during the April-June quarter. Many of them are also facing client-specific issues, which will be revealed during the first quarter performance. Meanwhile, existing deals are witnessing slow execution putting further pressure on top line.

“Signs of increasing pricing pressure as contribution of cost optimisation deals in overall order book and revenue are increasing, wherein competition is high and margins could be lower in the initial stages of deal ramp ups,” ICICI Securities said.

Topline Pressure

• Total contract value may ease in Q1/ FY24
• Large deals may not boost revenues of IT majors
• Operating margin under pressure owing to wage cost, increased competition