High deal conversion rate buoys IT firms

Although the deal total contract values (TCV) moderated sequentially to $21 bn, it is in line with the normalized historical run-rate. The deal conversion rate (TCV to revenue) has started improving with the resumption of high-priority transformation deals - Prabhudas Lilladher, a brokerage firm, in a note

Renewed Tech Spend

♦ Apart from cost, clients started spending on some digital areas

♦ In July, FPI inflows into IT stocks rose

♦ In Q1/FY25, TCVs of most large, mid-tier IT firms declined

♦ Many of them see as backlogs in projects getting cleared

Bengaluru: The deal conversion rate of Indian IT services companies has improved substantially in the first quarter of ongoing financial year, indicating willingness among clients to spend on technology projects.

In Q1 of FY25, total contract values (TCVs) of most large and mid-tier IT firms have declined, which many see as backlogs in projects getting cleared. Importantly, clients have started executing digital part of the deals, which can be seen as a precursor to recovery in discretionary spending.

“Although the deal TCV (tier-1 & tier-2) seems to have moderated sequentially at around $21billion, it is in line with the normalized historical run-rate. The deal conversion rate (TCV to revenue) has started improving with the resumption of high-priority transformation deals or deals that have long been paused, along with investments in foundational GenAI activities. The conversion improvement is evident through moderating BTB (Book To Bill) (around 1x in Q1 versus historical average of 0.8x), which stayed elevated at 1.2x over the last six quarters,” brokerage firm, Prabhudas Lilladher wrote in a note.

It also noted that anticipated uptick in fresher recruitment pointed towards a sustained demand recovery in the near to mid-term.

Management of all big IT firms have indicated during the just-ended first quarter earnings that current financial year is likely to be better than the last fiscal. Q1 revenue growth rates have already given some indication.

According to data compiled, median revenue growth of around two per cent year-on-year basis looks relatively encouraging for the sector (tier-1 &tier-2) after weak growth (below 1% YoY) reported in the last two quarters.

“Key growth vectors (BFSI & Retail), which have been sporadic over the last six quarters, synced with each other in Q1, while communications reported second consecutive quarter of growth. The broad-based growth was led by improved macro sentiment and spending beyond cost-saving,” the brokerage firm in the note said.

Sources in the know said that technology spend is no longer limited to cost savings, rather digital transformation projects have also started. Against this backdrop, the fears of slowdown in the US might be overstated, said those people.

According to NSDL data, Foreign Portfolio Investors (FPIs) net bought Indian IT stocks worth$1.40 billion in July, the highest in last two years. The Nifty IT index gained about 13 per cent in July on the back of such inflows, making its best monthly performance since August 2021, reports said.