IT cos facing margin heat despite big deals

Bengaluru: Big deals are raining in the technology industry with ample number of such outsourcing contracts coming the way of Indian IT services companies. Experts are of the opinion that such contracts provide comfort of revenue growth in coming quarters though concerns over margin dilution in the near-term and slow ramping up remain.

“In the last two months, several large deals have been bagged by Indian IT services companies. This augurs well for big IT firms as it provides revenue upside prospects in coming quarters. However, it doesn’t takeaway the concerns relating to these mega or large deals like margin pressure or slow ramp ups (seen in last few quarters),” Pareekh Jain, an IT outsourcing advisor & founder of Pareekh Consulting told Bizz Buzz. Historically, mega deals have been proved to be margin dilutive in nature as IT firms spend upfront to ramp up projects. Costs are recovered after certain time and more automation in the project is introduced supplementing the margin profile.

In the last two quarters, margins of most IT firms have come under pressure as revenue growth slowed down. While falling attrition and weak rupee have supported operating margins; slow ramp-up in projects, cancellation of projects and subdued flow in digital projects have put pressure on margins.

Despite such pressure, analysts indicate that bagging of large deals provide a comfort in terms of revenue growth prospects.

In the last two months, several large deal wins have been announced by the top four IT firms.In August, Infosys expanded its partnership with global telecom major Liberty Global in adeal valued at $1.6 billion over a five-year period. Through this partnership, Liberty Globalwill realise a savings of $109 million per annum. As part of the deal, more than 400 employees of Liberty Global would be joining Infosys, the company said. Earlier, Infosys won a deal from an existing client to provide AI and automation-led development, modernisation, and maintenance services. The deal was valued at $2 billion spread over a period of five years.

Similarly, market leader Tata Consultancy Services (TCS) expanded its long-standing partnership with UK’s largest workplace pension firm, Nest through an outsourcing contract worth around $1.1 billion spread over 10 years. Last week, TCS announced another large deal in which it has won a mega deal from Jaguar Land Rover (JLR) to develop ‘future-ready’ digital services for the luxury carmaker’s clients. JLR is a wholly-owned subsidiary of Tata Motors, in which Tata Sons is the largest shareholder. The deal is valued at 800 million pound ($1 bn), spreading over the next five years.

Another IT major HCL Tech won two major deals last month after a relatively sluggish first quarter performance in deal win space. In August, HCL Tech said that it has signed a $2.1-billion deal with Verizon Business for providing managed network services to its global enterprise customers. Towards the end ofthe month, it also announced an exclusive agreement with Cloud Software Group, to help implement, upgrade, modernize and provide services for its TIBCO products for enterprisecustomers across the globe. This large deal win will also see HCL Tech taking over 400 people.

In September, HCL Tech has announced clinching of two large deals. The company has been selected by Elders, a leading Australian agribusiness, to accelerate digital transformation across the latter’s business operations. Similarly, the company has bagged another large deal from German technology and high-tech industry giant Siemens AG.