Fear comes to the fore? Infosys deal recall shows headwinds not over for tech space

Amid all this, large deal wins which are usually multi-year contracts have been on a rise. All top IT companies believe the momentum will continue on this front.

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Tech giant Infosys on December 26 said one of its prospective clients has cancelled the deal focused on artificial intelligence solutions. It was a 15-year deal signed in September 2023. The deal termination comes at a time when IT companies around the world grapple with uncertainties and headwinds.

The cancellation, though too early to be tagged the beginning of a trend, points at the fact that the IT sector is still in the troubled waters despite the western economies arguably wading through the crisis, stoking the possibility of a recession.

Analysts and fund managers have also been hopeful about AI bringing dual benefits for the IT sector – more deals and less cost as AI can replace engineers. This cancellation of the deal is more likely a one-off setback, they believe.

“It is one-off thing,” said Krathi Bathini, director for equity strategy at WealthMills Securities. “We don’t have much information regarding the reason behind deal cancellation but it will be interesting to see how the Infosys management responds to this in the earnings commentary next month.”

Bathini pointed out that this instance does affirm that problems for IT companies are not over.

Though, if we go by the management commentary, IT companies have been prepared for such a situation. “Delays in decision-making continues,” accepted Nilanjan Roy, then CFO of Infosys in the Q2 earnings call. He had said that clients were taking a conservative approach in signing deals in several verticals, including financial services, communication, energy, utilities, resources and services.

The major concern for the industry has been reduction in discretionary spend by organisations across the world. IT spend for many companies comes under the discretionary head. For instance, in case of the Infosys deal cancellation, it is not necessary for a company to start their AI journey now and can be postponed.

Everyone believes that such a scenario is likely more short term than one that is likely to persist. “You know that, like everybody in our industry, we have a certain volume of our business that is more discretionary,” said Thierry Delaporte, CEO of Wipro in his last earnings call. “We might be a little more exposed than some others because of our significant presence in the consulting business in particular. And even if we know that it will be the first one to bounce back when the demand is there.”

Amid all this, large deal wins which are usually multi-year contracts have been on a rise. All top IT companies believe the momentum will continue on this front. However, one worry has been low revenue growth despite large deals flowing in rapidly.

Companies believe there is a specific reason behind a stagnation in revenue growth.

“The newly won deals are converting into revenue as expected, but these revenue inflows are getting neutralised by reduction in the existing revenue base as the transformation projects get completed... Or, in some cases, downsized. This has led to muted revenue growth,” said K Krithivasan, chief executive officer and managing director at TCS in his last earnings call.