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Top IT majors recorded one of their largest pipelines, most of them in digital, amid the pandemic than in the previous year. Going by the recent deal announcements, Q3 is likely to be as good, if not stronger for some.
Analysts expect these deal closures to result in an upgrade in revenue outlook for Q4 FY21 and also FY22.
What are we talking about?
On December 22, Bengaluru-based IT majors Infosys and Wipro signed large deal with German firms Daimler and Metro respectively. In both the deals, the IT majors will take over the captive centres of their German clients and will help them transform their IT infrastructure.
Infosys did not reveal the value of the deal with Daimler. However it was significant enough that, Nandan Nilekani, Chairman, Infosys, took to the microblogging platform Twitter to congratulate the firm on the deal win. According to a Times of India article, it was the largest deal ever in the company’s history and its estimated value is $3.2 billion spread over eight years.
In July, Infosys signed a large multi-year contract with the US-based wealth management platform Vanguard pegged at $1.5 billion, according to reports.
Wipro’s deal with Metro AG is estimated to generate $700 million in revenues in the first five years. It could go up to $1 billion with the intention to extend for additional four years, the company said in a statement. Wipro signed a large automotive software engineering deal, which some reports peg to be $200-250 million, with Marelli.
TCS signed a $2 billion deal with the Phoenix group in July-September quarter, taking the total contract value to $8.6 billion. In November, TCS took over the technology business units of two of its banking clients, Deutsche Bank and Pramerica Systems in Ireland. “TCS hasn’t made a significant acquisition before, so this is a major statement,” said Phil Fersht, founder, HFS Research, an analyst firm.
These deal wins are likely to push revenue growth for IT services firms in the next two quarters, according to analysts.
Brokerage firm Motilal Oswal pegs Infosys to grow at 8.6 percent revenue CAGR growth in USD over FY20-22 led by large deal wins, and high exposure to digital business.
Another brokerage firm Emkay expects Wipro’s growth to accelerate in FY22 to 8 percent from low single digit decline that the company has witnessed at the back of large deals wins the company has seen over the last few months. The firm's growth declined by 4 percent between April and September 2020 compared to the same period previous year.
Is this likely to continue?
Going by analyst and industry commentary, they are likely to. Goldman Sachs estimates COVID-19 will result in the third wave of outsourcing after the Y2K burst and global financial crisis.
IT industry body NASSCOM in a recent report said that the next 12-18 months will see enterprises increase their outsourcing budgets in the area of cloud and other digital channels. This presents huge opportunities for the Indian IT services industry, said UB Pravin Rao, COO, Infosys and Chairman, NASSCOM, during the release of the NASSCOM report.
This could be attributed to couple of reasons. Satya Nadella, CEO, Microsoft, said in a recent FICCI event that technology is no longer a nice thing to have for enterprises but core for survival. So as demand recovers, discretionary spending is likely to come back and projects that were paused would be ramped up.
A brokerage firm Motilal Oswal pointed out that, “We expect deal sizes to become bigger and cloud emerging as a key growth driver for the sector.”
In addition, as companies look to cut cost, they would want to consolidate their vendors and that is also where major IT firms are finding opportunities. For instance, Wipro’s Marelli deal and Infosys’ Vanguard are a part of vendor consolidation deals.
Pricing pressures, which firms faced in April-June, are easing as well with companies investing in technology.
Salil Parekh, CEO, Infosys, said during the recent event, said that pricing pressures are easing as well and there is “tremendous appetite for investment” as clients are looking at technology to drive growth, Parekh said.
"As we shared in the end of Q2, momentum is similar, steady and strong... we remain quite optimistic about everything we have seen in the quarter so far," he added.