Driven by deals, firms dare to dream

See recovery by the year-end.

Many information technology (IT) services firms believe they’re seeing the first signs of recovery in demand and some momentum in client conversion rates.

The recent multi-million dollar deals by the likes of TCS, Wipro and HCL Technologies buttress the fact. If the economy does not lose more steam, these companies say the IT sector may see a semblance of normalcy by year-end.

“We are seeing deal conversions across sectors — retail, pharma, energy and utilities, and travel and hospitality. Last year, it took longer to close deals, and some even got cancelled. However, in the current quarter (April-June), things are looking better,” said N Chandrasekaran, executive director and chief operating officer of TCS, India’s largest IT services company.

Some of the deals his company is pursuing are in areas of application management services and business transformation across sectors. “These are multi-year and fairly large deals,” he said.

Bangalore-based IT major Wipro is also optimistic on the current quarter, despite seeing relatively fewer client additions in the fourth quarter of the previous financial year (ended March 31). Girish Paranjpe, joint CEO of the company’s IT business, says: “Based on our observation on the number of client visits and their pipelines, each month is looking better than the previous one. April was looking better than March and March was better than February. Hopefully, we are heading towards a phase of stabilisation.”

Traditionally, the April-June quarter is a strong one. With some momentum in the current quarter, the industry is expected to witness better growth than the earlier quarter, though in single digits — no more than 5-8 per cent sequentially. Industry experts say the growth from this quarter is expected to come from deal renewals and new deals pertaining to optimisation of clients’ existing IT infrastructure.

“The current quarter looks a lot more positive than the previous one, though it might be for a short-term period. The pipeline and deal conversion in May and June look better. However, we should see the actual conversion of some of these deals by June-July this year,” said Sabyasachi Satpathy, co-founder and director of Mindplex Consulting.

However, some like Infosys Technologies, India’s second-largest IT services firm, gave a more conservative prediction for both Q1 and FY10. “We are waiting to see if this is really a recovery and whether it will be sustained. Unfortunately, at this point, the data are not clear. Our clients still believe there will be a decline in spending and IT budgets,” said S Gopalakrishna, CEO and MD of Infosys. Concurs the CFO, V Balakrishnan: “It’s too early to make any meaningful statement.”

In the Q4 ended March 31, 2009, most Indian IT services providers saw a nearly flat or declining growth in traditional sectors like financial services, manufacturing, retail and telecom. However, the healthcare sector is looking up and most expect growth in the months to come.

Analysts believe banking and financial majors have started opening purse strings. Most of them, however, are moving work to their captive units rather than giving it to third parties. However, once the economy recovers and the anti-outsourcing hoopla dies, growth is expected to be driven by the financial services sector. Phaneesh Murthy, CEO of iGate, says, “My sense is that the recovery for us will happen in Q3 of this calendar year, and much of the recovery will be driven by the financial services vertical.”