Improved traction in tech deal wins helps, but not by much
The trajectory of deal wins is improving for large Indian information technology (IT) services providers. For instance, last week, Infosys Ltd inked a memorandum of understanding with a global company to provide enhanced digital experiences for an estimated contract value of $1.5 billion. Close competitor Tata Consultancy Services Ltd entered into a strategic partnership with the digital unit of Jaguar Land Rover. This deal is valued at £800 million. In August, HCL Technologies Ltd struck a global partnership with Verizon Business.
“We believe deal flow has steadied after the transition from discretionary spending-powered short-tenured programs to larger programs fueled by cost take-outs, which have longer sales cycles,” said Kotak Institutional Equities analysts in a report dated 18 September. So, the brokerage expects a recovery in revenue growth for a few large companies to 9-10% in FY25 from about 4-5% in FY24.
Remember, delayed client spending on discretionary IT services, amid concerns of global slowdown, had hurt the sector’s revenue visibility. This had also soured investors’ sentiment towards the sector. However, sustained inflow of large deals should provide some comfort now.
“Deals won in recent months are spread across verticals and led by announcements in North America, followed by Europe and Rest of the World. The majority of deals were in the areas of cloud, automation and artificial intelligence (AI),” said Kumar Rakesh, analyst at BNP Paribas Securities India. As such, there is a lot of client interest in generative AI, although it is still at an exploratory stage. On an aggregate basis, the sector’s deal wins in Q1FY24 rose by 13% year-on-year and Kumar expects a further improvement in this metric in Q2FY24.
Meanwhile, so far in 2023, the Nifty IT index has rallied by 16%, beating benchmark index Nifty50’s 11% returns. One reason for why IT stocks have done well is owing to the improving macro expectations in the US. To be sure, increased deal inflows is a positive for the sector, but it may not lead to large upsides in Indian IT stocks in the near term.
A key trigger ahead remains the pace of revival in revenue growth and margin expansion. On the flipside, a slower-than-expected ramp up of large deals is a risk. Also, there is little clarity as of now on how the demand scenario for IT services, especially from developed markets, pans out in H2FY24. Given this, the sector’s valuations appear rich and this could cap meaningful gains.
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Updated: 18 Sep 2023, 11:13 PM IST
