IT firms likely to see deal flow slowdown

Bengaluru: Indian IT services players are likely to see slowdown in deal signings with cross currency headwinds eating into margins in the current financial year.

According to brokerage firms and experts, the first quarter results of Tata Consultancy Services (TCS) reflect cautious optimism of growth prospects for the IT industry.

"TCS results indicate cautious optimism. While the revenue growth remained strong, fall in margin was on an expected line. The key takeaways from TCS Q1 earnings are that deal signings may slow down for all IT firms in coming quarters amid recession fears. Another key trend coming out from the fall is the net employee addition number in first quarter in case of TCS indicates early signs of slackening demand," said Pareekh Jain, an IT outsourcing advisor & Founder of Pareekh Consulting.

During the first quarter of FY23, TCS' deal win TCVs was $8.2 billion that included a couple of $400 million-plus deals and no mega contract.

In comparison, the market leader had a total contract value of $11.3 billion in the fourth quarter of last financial year. The management of TCS said that the fall in TCV was not a point of concern given that the company's usual TCV range per quarter stayed at $7-8 billion per quarter.

"Moderation in EBIT margins and lower order book would reduce the pace of earnings growth going ahead and may lead to downward revision to valuation multiple," Reliance Securities said in a note.

The management had said though the demand environment and deal pipeline continued to be strong, it remained vigilant on macroeconomic uncertainties.

"Pipeline velocity and deal closures continue to be strong, but we remain vigilant given the macro-level uncertainties. Looking ahead, we remain confident in the resilience of technology spending and the secular tailwinds driving our growth," Rajesh Gopinathan, CEO & MD of TCS has said.

In the quarter ended June, TCS added 14,136 employees in the first quarter of FY23, taking its headcount to over 6 lakh. However, the net addition number was lower than the preceding quarter and also the same period last year. In Q4 of FY23, TCS added 35,209 employees, the highest ever net addition in a quarter. In the same period of last fiscal, the net addition numbers were at 24,000.

"While the company is moving to more agile mode of operations with employing people as per demand, it also indicates that confidence on demand environment is coming down. Moreover, higher subcontractor cost shows that demand is more in some pockets than across sectors," said another analyst.

Meanwhile, despite high attrition, most brokerage firms remain optimistic about attrition numbers coming down from the second half of FY23. Kotak Institutional Equities said in a note that attrition of 20 per cent is expected given the demand for talent.