14 Jul 2023 , 10:09 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) Managed services ACV grew 5% YoY/1% QoQ in Q2CY23, to USD10bn, registering its best quarter ever, driven by record deals in IT outsourcing and EMEA markets. 2) ISG maintained its CY23 forecast of 5% YoY for managed services, as bookings remain strong with a focus on renewals. 3) As-a-service ACV declined 18% YoY/9% QoQ, which has been the worst YoY decline since the tracking of the market. With the Big 3 hyperscalers continuing to face challenges, ISG has further reduced its As-a-service growth forecast to 11.5% (from 15%). 4) ISG highlighted that the decline in US region is primarily driven by the BFSI while pricing pressure is not significant. 5) Among the Indian vendors, Mphasis dropped from top 10 vendors in its category while EPAM was the other key dropout among the international vendors. Analysts of IIFL Capital Services believe ISG data reconciles with healthy wins announced by Indian IT vendors and gives comfort on revenues being relatively resilient once macro stabilizes.
Managed services sees record activity in Q2FY23:
Managed services saw another quarter of record bookings, with ACV at USD10bn, as ISG continues to see strong demand for cost optimisation in the broader markets. As-a-service market ACV further declined amidst worsening macro. Combined ACV declined 9%, which is primarily due to the decelerated demand for cloud services compared to the pandemic period. Managed services ACV in Americas declined 6% YoY. EMEA markets witnessed a 15% YoY growth in managed services ACV, while APAC managed services ACV grew by 38% YoY.
Key notables from the con-call:
1) IT Outsourcing had its best 1H, with ACV at USD14.6bn, registering a 13% YoY growth over H1CY22, primarily driven by ADM, constituting ~70% of the total ITO award value 2) APAC generated over USD1bn in ACV, with both new scope and renewal ACV finishing strong. 3) Within the overall industry, growth in managed services ACV during H1CY23 was primarily driven by the Healthcare, Energy and Manufacturing 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 near term pause in discretionary spending, albeit 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 9% in FY23-FY25 (vs. 15% in FY23), which is still above pre-COVID levels. Analysts of IIFL Capital Services recommend to stay selective, with preference for INFO/TCS (large-caps) and PSYS/COFO (mid-caps).
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