Mega deals paper some cracks for in-turmoil IT firms

Amid the tricky financial year 2023-24, IT firms saw losses in revenue from their telecommunications clients—suggesting that a rejig could be in order. 

India’s USD 254-billion IT services firms saw telecom clients offer a mixed bag through a topsy-turvy FY24. While India’s top three IT services firms bagged mega, USD 1 billion-plus digital transformation and tech services deals from domestic and global telecom firms, Tech Mahindra struggled through a year of transformation for the fifth and final large-cap, homegrown IT services firm.

Tech Mahindra’s struggle is significant and sets the context for what could play out soon. The latter is India’s most prominent tech services provider for the telecommunications industry—raking in USD 2.32 billion from the sector even in a weak year. However, this revenue has come at a cost for the company—its income from telecom clients dropped by USD 330 million through FY24, a 12.1% decline compared to the previous financial year. In comparison, its net revenue declined by 5% to USD 6.27 billion for FY24.

Tech Mahindra’s income from telecom clients dropped by USD 330 million through FY24, a 12.1% decline compared to the previous financial year.

This clearly shows that telecommunications as a sector has underperformed—and threatens to be a weak industry to rely on amid macroeconomic concerns and inflationary pressures. Industry analysts, thus, warn of caution in the telecommunications sector, which could defer their tech spending and cause a dent in the entire IT services economy.

To be sure, telecommunications is a crucial market for India’s top IT services firms to fish for clients. Through FY24, the segment generated USD 8.25 billion in net revenue for the top five IT services firms, declining nearly 3% over FY23. While this decline is not empirically vast, it is crucial given that telecommunications accounts for just over 10% of the net revenue the top five software outsourcers earned last fiscal year.

Mega Deals to the Rescue

At least two analysts, speaking on condition of anonymity, told Voice&Data that the scenario for the top five IT services firms in the telecom vertical could have been far worse—had it not been for mega deals.

For instance, in May 2023, Tata Consultancy Services, India’s largest IT services and consultancy firm, bagged a USD 1.83 billion contract from India’s state-run telecom operator, Bharat Sanchar Nigam Limited (BSNL), to rollout 4G network services for the telco. Soon afterwards, in August 2023, Infosys, the second-largest of the bunch, bagged a USD 1.64-billion digital services deal from Europe-headquartered telecom services conglomerate Liberty Group.

In the same month, HCL Technologies signed a USD 2.1 billion deal to operate managed network services for US-headquartered Verizon Business, the enterprise arm of the communications group Verizon.

The above deals prove that the overall industry could have fared much worse without these outliers. Mega deals valued at USD 1 billion and above are few for any IT services firm. Still, they are the most lucrative since they offer strong operating margins, cover various programmes, and represent good long-term relations between the client and the firm.

This relationship appears to have pulled Tech Mahindra through this weak phase—for instance, in 2019, the company signed a USD 1 billion-plus digital transformation and services deal with US-based telecom operator AT&T.

Industry analysts warn of caution in the telecommunications sector, which could defer their tech spending and dent the entire IT services economy.

However, the availability of at-bulk, smaller, cost optimisation deals in the telecom segment signals concern.

Why the Weakness?

Take TCS, for instance. One quick look suggests that the company’s telecom revenue should have grown through FY24. However, despite winning the BSNL deal, the company saw a 1.5% decline in revenue earned from telecom services to USD 1.98 billion. This implies two things: BSNL itself is yet to ramp up the execution and billing of the deal, and deferred payments have not really led to any significant growth in the telecom revenue TCS earned through FY24.

The second is that beyond BSNL, TCS appears to have seen a net revenue dip for the segment through FY24.

Wipro, the fourth in terms of net revenue in the group, has the smallest telecom practice of the lot—and is the only one with revenue below USD 500 million for the entire year from telco clients. Yet, despite the smallest revenue base, Wipro’s telecom revenue dropped the sharpest—dipping by 13.7% to USD 454 million in FY24. This marked a net loss of USD 72 million in net revenue for the entire year, over 15% of Wipro’s 3.8% net revenue decline in FY24.

Interestingly, on 30 April, Wipro disclosed a deal “worth several million dollars” from Finnish telecom major Nokia to handle its employee and IT services. Such a deal may have some impact on improving Wipro’s telecom offering, but no official financial details have been published beyond this.

“Telecom companies are being cautious. Consumer tech spending has been declining steadily globally for the past two years, and 5G rollouts worldwide have not seen the kind of enterprise demand and enthusiasm that were initially projected. This means that, at present, telcos around the world are under pressure, which could only be exacerbated given the present macroeconomic and inflationary conditions. Unless any relief comes along and the inflation threat cools off, telcos will continue to remain conservative—and thus pull back on unnecessary spending,” said one of the analysts.

“Such an offset would not be insignificant since telco clients account for over 10% of the net business of our large-cap IT firms. The latter would push for larger deals to offset the losses, which Infosys and HCL have successfully pulled off. But this cannot be a regular strategy—unless the market improves, we’re in for even worse lows in the telecom sector,” the second analyst added. Both requested anonymity since their reports on the sector to investors are yet to be published by their brokerages.

Despite winning the USD 1.83 billion BSNL deal, TCS saw a 1.5% decline in revenue from telecom services to USD 1.98 billion.

To be sure, Infosys saw its telecom revenue rise 6.1% over FY23 to USD 2.28 billion, while HCL Technologies reported a 5.2% revenue growth in telecommunications to USD 1.22 billion. Both saw their growths fuelled by their large deals with Liberty Group and Verizon Business. Infosys counts telecommunications as a key vertical, with over 12% of its net revenue coming from here, which is higher than the industry average and only behind Tech Mahindra.

While only time will tell how the industry progresses, analysts believe that a rampant revival in telco tech spending will be unlikely. The sector is resilient, so spending will likely return once the market turns upward, driven by global economic cues. Until then, investors in IT services and telecom companies would do well to exercise caution.

By Vernika Awal

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