Healthy deal activity in Managed Services in IT sector: IIFL Capital Services

13 Oct 2023 , 11:12 AM

Analysts of IIFL Capital Services attended a conference call with Information Services Group (ISG), an outsourcing advisory firm working with over 500 corporates globally. Key takeaways: 1) In Q3CY23, Managed Services ACV grew 12% YoY/4% QoQ to USD10.4bn, registering the second-consecutive quarter of USD10bn+ TCV, driven by strength in IT outsourcing and Americas. 2) ISG raised CY23 forecast for Managed Services to 5.4% YoY (earlier 5%) as demand remains strong, particularly for cost optimisation projects. 3) As-a-service ACV declined 13% YoY/2% QoQ, marking its sixth-consecutive quarter 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 decline exceeded the IaaS basket. ISG has maintained its As-a-service growth forecast at 11.5%. 4) Among the Indian vendors, Mphasis returned to the top 10 vendors in its category, while Coforge stepped up a category, joining the USD 1-3bn revenue bracket. Analysts of IIFL Capital Services believe ISG data reconciles with healthy wins announced by Indian IT vendors; however, conversion to revenues could come with a lag. 

Managed Services maintain momentum in Q3CY23: 

Managed Services saw another quarter of record bookings, with ACV at USD10.4bn. This is because ISG continues to see strong demand for cost optimisation in the broader markets. As-a-service market ACV further declined amidst a worsening macro. The combined ACV declined 3% YoY, primarily due to weakness in the IaaS market. Managed Services ACV in Americas grew 25% YoY. EMEA markets witnessed a 3% YoY decline in Managed Services ACV, while APAC Managed Services ACV declined 13% YoY. 

Key notables from the call: 

1) Nine mega deals were announced in the Managed Services segment, bringing YTD total to 27 mega deals. 2) Cloud booking remains under pressure, as the Big 3 hyperscalers struggle with consumption. 3) Within the overall industry, growth in Managed Services ACV during M9CY23 was primarily driven by the Energy, Healthcare & Pharma and Telecom & Media sectors, while weakness was observed in the Business Services and Travel & Leisure sectors.

Commentary by Indian IT firms indicates near-term caution, even as deals remain strong: 

Indian IT firms’ commentary suggests slowdown in discretionary spending, digital transformation projects and slow decision-making, although the deal wins remain healthy and pipelines remain strong. Analysts of IIFL Capital Services expect Indian IT Services sector to clock USD revenue growth of 7% in FY23-FY25 (vs. 15% in FY23). They recommend staying selective, with preference for INFO/TCS (large-caps) and LTIM/PSYS/COFO (mid-caps).