Analysts of IIFL Capital Services attended a conference call with Information Services Group (ISG), an outsourcing advisory firm working with 500+ corporates globally. Key takeaways: 1) Managed Services ACV was flat YoY/-3% QoQ in Q4CY23, at USD10bn; registering the third consecutive quarter of USD10bn+ ACV, driven by strength in IT outsourcing and EMEA. 2) ISG expects Managed Services to grow 4.25% YoY (vs 5% YoY in 2023) in 2024, driven by demand for app modernisation and business transformation, led by GenAI. Overall tech budgets are expected to be flat YoY. 3) As-a-service, ACV declined 6% YoY/+2% QoQ, after six straight quarters of sequential decline. The Big 3 hyperscalers, which represent more than 65% of Infrastructure-as-a-Service (IaaS) market, continue to face challenges, as their YTD ACV declined more than IaaS basket. ISG expects As-a-service ACV to grow 15% in 2024, on a favourable base and acceleration of Cloud spend. 4) Among the Indian vendors in the Standout providers, LTTS stepped up a category, joining the USD 1-3bn revenue bracket; while Tata Technologies entered the <USD1bn revenue bracket. Analysts of IIFL Capital Services believe the commentary from ISG corroborates their view of 2024 being a year of gradual recovery for the Indian IT services.
Managed Services remains healthy:
Managed Services saw another healthy quarter of bookings with ACV at USD10bn, as ISG continues to see strong demand for cost optimisation in the broader markets. As-aservice market, ACV ticked up sequentially (+2% QoQ); but still reported a YoY decline of 6%. Combined ACV declined 3% YoY, primarily due to weakness in the IaaS market. Managed Services ACV in Americas grew 4% YoY. EMEA markets witnessed an 8% YoY increase in Managed services ACV, while APAC Managed services ACV declined 38% YoY.
Key notables from the con-call:
1) 8 mega deals were announced in the Managed services segment, taking 2023 total to 34 mega deals. 2) The rate of decline for Cloud booking moderated as the SaaS market witnessed a rebound. 3) Within the overall industry, growth in Managed services ACV during CY23 was primarily driven by the Energy, Healthcare & Pharma and Retail sectors, while weakness was observed in Financial Services, Manufacturing, Business services and Travel & Leisure sectors.
Pickup in discretionary spend to be gradual:
Demand commentary from ISG reaffirms analysts of IIFL Capital Services view that 2024 could potentially be a year where the pace of recovery will be gradual. H1 is likely to see continued pressure on discretionary spend and the focus is likely to remain on the cost optimisation deals. Analysts of IIFL Capital Services expect Indian IT services sector to clock USD revenue growth of 7% in FY25 and revert to pre-Covid levels only by FY26. Analysts of IIFL Capital Services recommend to stay selective with firms providing better visibility despite rich valuations (INFO/PSYS/COFO).
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