Large deals unlikely to yield margins for IT cos

Bengaluru Large deal wins in recent months by Indian IT firms have raised hopes of offsetting the impact of slowdown seen in the technology industry, but industry experts opine that such deals are fraught with risks and often under-deliver.

In recent months, several large deals were bagged by Indian IT majors including Tata Consultancy Services (TCS), Infosys, Cognizant among others. Mega deals usually range from $500 million to $2 billion, which are executed over many years.

“In theory, large deals could be highly profitable. However, they carry a lot of risk and often under-deliver. Notably, this has happened several times in the recent past with Infosys disappointing last quarter as key example,” Peter Bendor- Samuel, CEO of global consultancy firm, Everest Group told Bizz Buzz.

In the first quarter of current financial year performance of which is going to be reported by IT firms from July first week onwards, it has seen several mega and large deals coming in the way for large IT 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-headquartered firm, 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 (around $1.1 billion), spread over an initial tenure of 10 years.

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.

According to sources, companies usually invest heavily in the beginning of such large contracts, which pull down their operating margins. However, they are able to recover the cost with handsome margin towards the end years of the contract.

“In this current environment, the large deals are often back loaded. That is to say, large investments are made by the tech services firms upfront and then, tech services firms are able to recoup their investment and make money in later years. This phenomenon is somewhat offset by completion accounting where the tech services firms are able to recognize some of the revenues as they complete the transformation,” said Bendor- Samuel.

In the fourth quarter of FY23, most large firms were not able to see revenue accretion coming from large deals despite strong deal pipelines. This was due to the delay in ramping up of projects as clients hold back delivery owing to uncertain economic environment. Even some companies have seen project cancellations. In June, Transamerica cancelled $2 billion deal with TCS ahead of schedule.