Big ticket deals fail to cheer IT investors

There will be a number of large deals announced in Q3, but these will be heavily discounted as there continues to be a growing gap between book to bill or bookings and revenue. The street has lost confidence in the book to bill ratio as a predictor of revenue growth and the large deals contribute to this controversy - Peter Bendor Samuel, CEO, Everest Group, tells Bizz Buzz

Bengaluru: Large deals announced by Indian IT services providers and even their global peers have failed to enthuse investors’ faith in any near-term recovery of technology spend.

According to experts, things will be no different in the third quarter, for which results are going to be announced in coming weeks and beyond. Investors have already started discounting such large deals announced as they don’t add any meaningful revenue.

“There will be a number of large deals announced (in the third quarter), but these will be heavily discounted as there continues to be a growing gap between book to bill or bookings and revenue. The street has lost confidence in the book to bill ratio as a predictor of revenue growth and the large deals contribute to this controversy,” Peter Bendor Samuel, CEO of global consultancy firm, Everest Group, told Bizz Buzz.

During the second quarter ended September, the top four IT services firms reported healthy deal pipeline despite reporting subdued growth outlook for the current financial year.

Market leader Tata Consultancy Services had a total order book of $11.2 billion in the second quarter as many cost takeout deals got bagged by the company. Infosys bagged its highest ever large deal worth $7.7 billion during the second quarter out of which 48 per cent was net new. Deal pipeline of Wipro remained robust as it won deals worth $3.8 billion, up by 6 per cent YoY, while its large deal bookings was at $1.3 billion, up by 79 per cent YoY. Similarly, global IT firms Accenture & Cognizant also posted healthy deal bookings.

Despite all the large deal bookings, revenue growth forecast for the current financial year remains tepid by all IT firms. Analysts said that low book to bill ratio in recent quarters indicate the predicament of IT services companies. Book to bill ratio is the metric which shows how much of the deal actually translates into revenue. Though most Indian IT firms don’t provide these numbers, sources in the know said that the number has been on a downward trend as clients provide low volume of work order for execution.

Management of IT firms have also indicated the same saying that ramp ups are getting delayed.

“Many of these deals have time as they start to ramp-up, the way that they are structured, the way the transitions happen. We see those ramp-ups, those scalingup of the large and mega deals more out into the future, backend of the year and as some of thenew deals are coming on beyond that,” Salil Parekh, CEO of Infosys has said during the analyst call in the second quarter.

During the October-December period, big IT firms have announced several large deal wins. Investors will keenly watch the translation of revenue from such deals apart from management commentary on ramp ups.