Rising IT deal flow bodes well for FY15

The new financial year seems promising for the Indian information technology (IT) services sector.

For the first time since 2008, the March quarter of this year saw the sector signing 10 contracts worth more than $100 million in annual value. 

The global value of $5.7 billion in the first quarter was generated, to a large extent, by new-scope awards, which saw a value growth of 41 per cent year-on-year, to $3.6 billion.

Growth was particularly strong in new-scope information technology outsourcing (ITO), both by value and number of contracts awarded, according to the ISG Outsourcing Index.

The index, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, also shows that though new scope work was high, restructured contracts continue to represent a substantial and growing portion of the market, at least by deal count, up 24 per cent over the past 12 months. ISG is one of the world’s largest third-party deal advisor.

The index confirms what some Indian IT companies have been saying about growth picking up in the first half of the year. ISG also said it expected ACV to grow in excess of 15 per cent in the first half.

“The year is off to strong start, thanks in large measure to the reappearance of the mega-relationship and a surge in new-scope ITO awards. That bodes well for both the first half and the full year. We now expect at least 15 per cent ACV growth in the first half and high single-digit growth for the full year. We believe the number of contracts likely will continue to grow at a faster pace than ACV, particularly as many second-generation contracts are renewed and restructured in multi-sourced environments,” said John Keppel, president and partner of ISG. 

He added though the first-quarter numbers were a cause for euphoria, a more sober view emerged when one analysed performance for the trailing 12 months. “ACV in that period was down 11 per cent from the prior 12-month period, yet the number of contracts awarded for the most recent 12 months - 1,183 - is at an all-time high. That seems to indicate enterprises are continuing to opt for greater flexibility and more specialised service that comes with smaller, shorter contracts awarded to a greater number of providers,” he said.

Ashwin Mehta and Pinku Pappan of Nomura Equity Research write in a report, “These findings are positive from a demand perspective for India IT as one, it indicates a strong start to the year with likely first half ACV growth of 15 per cent or more; two, suggests some pick-up in the Americas (highest ACV in the past four quarters) and Asia-Pacific (about 90 per cent y-o-y growth), which have underperformed tier-I IT growth on a last-12-month basis; and three, continuation of strong growth trends in Europe.”