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Indian IT companies to see resilient demand despite cloudy outlook on hyperscalers

According to industry experts, client companies are in the phase of realising the benefits of aggressive cloud-related investments they made in the last couple of years. Therefore, IT services companies will continue to get more deals on consulting and optimisation of existing cloud spends.

February 17, 2023 / 03:08 PM IST

Indian IT services companies, such as Tata Consultancy Services (TCS), Infosys, Wipro, HCL Tech, Tech Mahindra and LTIMindtree, will continue to see deals around optimisation of existing cloud spends and consulting, compensating for the slowdown in deal wins involving the big three hyperscaler cloud-service providers.

Earlier this week, Moneycontrol had reported that the big three cloud-service providers -- Amazon Web Services (AWS), Microsoft Azure and Google Cloud Platforms (GCP) – together reported a single-digit YoY growth in deal wins by annual contract value (ACV) in Q4CY2022.

This has been a fall from a 57 percent YoY growth in ACV in Q1. Revenue growth, too, has been steadily declining consequently.

This, however, won’t have much of an impact on IT services companies, despite them working closely with these cloud-service providers, industry experts told Moneycontrol.

The current slowdown, following the past couple of years of aggressive pandemic-driven cloud and digital transformation spending, will get compensated with the phase two transformation projects involving implementation and cost optimisation, they said, amidst clients rethinking technology budgets due to inflation and increasing macro-economic challenges globally.

According to Sanjay Jalona, an industry veteran and former CEO and Managing Director of L&T Infotech (LTI), there is a lot of work to be done, now that client companies have made quite some investments in hyperscalers.

Jalona, currently the operating partner at ChrysCapital, said: “I believe there is a lot of work to be done for all the investments clients have already made with hyperscalers. Though the growth rate would probably be a bit soft, I think the growth rate on cloud would continue for IT companies.”

Pareekh Jain, founder and CEO, EIIRTrend, said that, in the last fiscal year, every digital deal involved cloud migration as a part of it. And currently, almost 40-50 percent of the active deals for IT service providers are digital.

Lots of existing cloud-migration clients still there

So, even if new cloud migration deals are not happening, there are still plenty of customers who have already migrated to cloud and want to move to the next level.

“Adding new customers for migration will be on a pause. But existing customers who have already migrated to cloud will continue to extend deals with service providers to implement and optimise for them,” Jain said.

There will still be some impact on budgets for IT services but the impact would be lesser, he said.

“We are seeing a decline in growth rate, YoY, but hyperscalers are still growing. This will impact our IT service providers too. Clients were spending a lot on cloud earlier and then service deals were coming to service providers. As clients relook at cloud spend, they will relook at the services spend also, but to a lesser extent,” he told Moneycontrol.

Speaking about the nature of deals being observed, Mrinal Rai, Principal analyst at ISG, said IT companies are helping clients design their strategies and consulting on how to move those workloads.

“This is the time when those enterprise clients are actually implementing these strategies. So there is enough work around cost optimization, retransformation and refactoring, which will require a lot of expertise,” he said.

Many of these would fall under the core managed services practice of outsourcing the responsibility for maintaining, and anticipating the need for a range of processes and functions, among other facilities, provided by IT services companies.

All of this does echo the words of the IT industry too. Last month, in an interview with Moneycontrol, Rajesh Gopinathan, CEO and MD of TCS, highlighted that there has been mindless spending on cloud lately, and that this will lead to specific project-led cloud spending by companies to bring down cloud costs. IT companies, especially TCS, will benefit from this trend too, he said.

"Once you have done the architecture, it actually unleashes a second round of transformation, which is the right reason to go to cloud. You can open up your architecture for much more composable functionality so that as your business model shifts, you will be able to move faster with it, or your upgrade cycles will be faster,” Gopinathan had said.

During its earnings meeting last month, Infosys’ CEO and MD Salil Parekh, too, said that the company’s large deal pipeline is seeing increased traction for automation and cost-efficiency programmes.

According to Forrester Research India’s Head of Research Ashutosh Sharma, IT services firms have a very good portfolio of projects across dimensions and they specialise in cost reduction.

“Any company trying to cut down their on-site costs, cost of IT in other geographies, and offshoring will come to IT companies. They compute and analyse data as well. IT companies have always benefited from these downtrends,” he said.

“But this will depend on the extent of downtrend that will occur and how much the clients will cut down from discretionary spending,” he added.

Queries sent to Infosys and HCLTech did not elicit any response. TCS, Wipro, TechMahindra, Cognizant and LTIMindtree declined to comment.

Not all gloom

It’s not all gloom ultimately for cloud-service providers either, said Amit Chandra, Deputy Vice President, HDFC Securities. Despite the slowdown in YoY growth percentage, the base of comparison has increased as the combined size of the three hyperscalers have grown $100 billion to $200 billion, according to Chandra.

Several companies, including IT companies like HCLTech, TCS and LTIMindtree, remain bullish on the opportunities expected from cloud in 2024. Chandra added that managed services growth rates too have not come down significantly.

“AWS, Azure and Google Cloud, combined, is a business of about $200 billion in size. The growth rate of over 35-40 percent has come down to 25-26 percent. One needs to see what incremental revenue they are adding,” he said.

“Earlier, when they were growing at 40-50 percent, the size of the top three players together was sub-$100 billion. They were adding $30-40 billion, incrementally. Now at a size of $200 billion, if they are growing at 25 percent, they are still adding $40-50 billion, and the incremental revenue still remains the same,” he explained.

Debangana Ghosh
Debangana Ghosh