IT mega deals in sight as talks at final stage
Massive digital transformation initiatives by large enterprises expected to provide mega deals (over $1bn) to Indian IT firms in next 2-3 quarters
Bengaluru: Indian IT services companies may see a few mega deals coming up in the next two-three quarters as large enterprises are in the process of finalising the last phase of their massive digital transformation initiatives.
Mega deals usually have value of a billion dollars or more with the engagement spreading across several years. In the current financial year (FY22), domestic IT firms have not bagged many such mega deals, which was the case FY21. These mega deals were the single biggest reason for pushing up the revenue growth of many large IT firms including Infosys and Wipro.
"There are several Fortune-500 companies that are planning their last phase of mega transformation. Still 25 per cent of mega deals in clients' portfolio are not bided out. It may come to the market in FY23. There are another 2-3 quarters of runway (left) for mega deals," said Barnik Chitran Maitra, Managing Partner & CEO of global consultancy firm, Arthur D Little (India and South Asia).
Despite not bagging large deals, most large and mid-tier companies have posted a robust deal pipeline with strong total contract value (TCV). TCS reported a total contract value (TCV) of $7.6 billion, while Infosys' big deals were pegged at $2.53 billion in the third quarter ended December, 2021. In the case of Wipro, it was $2.85 billion. HCL Tech has also seen strong booking performance during the period with TCV of new deal wins at $2.135 billion, registering 64 per cent growth over last year period.
These deals were a mix of large and mid-sized deals bagged from many clients. Company officials had said that spread of deals across many clients reduced the concentration risks.
"The $7.6 billion TCV is broad-based and not skewed to a particular deal or region. We have seen demand across regions and sectors," said Rajesh Gopinthan, CEO and MD of TCS.
Analysts also pointed out that spreading of contracts across geographies, vertical and clients support the operating margin profile. "Mega deals are not necessarily high margin deals. So, it is not necessarily bad for Indian IT players if those deals go down. Offshoring is like a consumer trend which will support the margin levels," said Maitra.
During the current financial year, most Indian IT firms have done a good margin defence. However, margins are likely to come under pressure as travel resumes and employees start operating from offices. Also, cross currency movement like rupee versus dollar can create challenges for margin expansion. In this regard, large number of smaller deals is likely to be support operating margin of Indian IT firms.
