IT services firms expect resilient Q3, say analysts

While December is typically considered the weakest quarter for the sector , IT services providers in India could continue to see marginal growth despite India’s IT indices having taken a beating of over 26% in the past one year, they added.

On Tuesday, the 30-share BSE IT index, which lists all IT firms on the BSE, closed at ₹28,671.67, up 0.9%. The index is down 25.9% from its 52-week high. The Sensex closed at ₹60,927.43, up 0.6%. The benchmark BSE index, too, is down 4.1% from its 52- week high.

The metrics show the extent of correction that India’s IT services sector has undergone in 2022. Analysts said this is a sign of an expected course correction following the unexpected high growth in 2021.

The IT services industry may see marginal growth, despite December being a seasonally weak quarter, Omkar Tanksale, equity research analyst at Axis Securities, said. “We’re expecting 2.5-6% of revenue growth momentum to continue in Q3 (FY23). This could be a result of the large deals of the last quarter coming into implementation, and could be a consistent driver of growth for the sector in the coming quarters as well. In terms of deal wins, some cut-downs should happen— large-cap and mid-cap IT firms could see a fall of 20% in new deal wins in this quarter, although the quantity of deals should persist,” he added.

Chirajeet Sengupta, partner and lead, global technology services, Everest Group, said the trend of large deal quantity versus deal size may become a trend. “2023 will be all about rationalizing and steadying the IT industry following the uncertainties and decline of 2020, the lopsided growth pace of 2021, and the consolidation in 2022. It could come from multi-decade digital transformation drives which will continue despite cyclical upturns and downturns in certain quarters,” he added.

Explaining why large deals may fall, Sengupta said: “Enterprises are value-conscious, and large deals of $500 million or so have implementation challenges. Effectively, it locks in a lot of decision making and investments that companies do not prefer.. It causes the phenomena of higher deal volume, but smaller sizes.”

Data shared with Mint by market research firm BNP Paribas on the Indian IT services sector’s deal signings in November reflect this, showing muted large deal signings across the sector. While Tata Consultancy Services (TCS) signed four multi-year deals including those with Standard Chartered Singapore and staffing firm Randstad, Infosys signed one deal in November with electric vehicle battery developer Envision AESC, and HCLTech signed one deal in the same period — with medical resource provider SR Technics.

HCLTech, on December 12, also announced a multi-year expansion to an existing deal with global FMCG firm Mondelez International, to provide cyber security and digital workforce transformation services.

Wipro, too, announced a multi-year extension to provide digital transformation services to tech firm VMware’s clients on November 11.

Such deals, according to Ruchi Mukhija, vice-president at Elara Securities, showcase “mixed signals in the industry.”

“Amid uncertainty, the intensity of large deals was already expected to come down. But, Accenture’s recent report spoke to the contrary — highlighting slow momentum in small deals that are discretionary in nature. Another factor is that there are macroeconomic challenges, for which clients are focusing on cost optimisations. As a result, these cost-effective deals are large, multi-year deals in the IT sector. But, industry stakeholders are indicating that clients are looking for quick outcomes, and thus of small tenures — hence signaling the prevalence of small deals as well,” she added.

On top of deals guidance, analysts expect attrition to decline, thus easing margin pressures on the IT firms. Axis Securities’ Tanksale said, “Moderation in attrition levels could see an industry-wide decline in attrition rates by 2-3%, which in turn could boost operating margins by 30-100 basis points this quarter.”

Everest Group’s Sengupta concurred, stating that the industry average for attrition is likely to remain “between 16-17%” during this quarter. In the September quarter, Infosys reported the highest attrition rate among the ‘big four’ IT firms, at 27.1%. Tech Mahindra, with 20% attrition rate in Q2FY23, reported the lowest in the industry — a figure that industry experts say will decline further.