Good earnings used to come in little packages for Indian IT businesses and investors.

During the epidemic, India‘s GDP accelerated, and Information Technology organisations’ forecasts, owing mostly to enterprises releasing an unprecedented rush of investment on smaller initiatives.

In fact, there were so many tiny projects flooding the market that IT organisations couldn’t forecast their own income. Accenture said in December 2020 that its revenue for the September-November period of that year was USD 200 million higher than it had expected.

The spike in demand created a lack of talent to meet it, sparking a talent war. IT organisations pay exorbitant salaries to acquire & retain talent, causing their margins to collapse.

The tide of tiny agreements has now subsided, but bigger offers remain on the market. However, because of how the different partnerships function, the move has had an impact on IT-service income. The shortage of small acquisitions would exacerbate an already poor FY24 for Indian IT.

Accenture CEO Julie Sweet believes that their clients are putting off the minor issues in order to focus on the big picture, which obviously translates to revenue differently. So they must make every effort to maximise the minor deals.

Accenture has a fiscal year that runs from September to August, and Sweet noted that the business needs to observe if the number of small agreements increased in the current quarter before making any projections about the year ahead.

For years, IT organisations & investors concentrated on huge transactions that might move the needle rapidly & drive an IT company’s growth to the next level.

Smaller transactions, on the other hand, required continual replacement by the sales staff as they approached conclusion and revenue ceased. This is what investors refer to as the distinction between annuity contracts, which are often larger and have regular revenue, and project-based employment.

However, the advancement of digital technology and the transition to agile delivery have altered some of that thinking.

Smaller projects are more likely to be digital and more expensive due to the requirement for greater skills. They are also distributed fast if you are already a strategic provider, and there is less of a request for proposal and negotiating process. As a result, they convert to income swiftly, according to a client account manager at one of India’s top three IT firms.

Larger transactions have shifted towards consolidation in recent years. Clients demand upfront bulk savings and continuous efficiency increases of up to 10% per year on bigger contracts. This influences how much money can be produced from a huge deal in India.

Large transactions reduce an IT company’s margin in India in the beginning due to the expenditures required, which are subsequently made up as the project progresses. Furthermore, huge transactions in India are fraught with problems and, in the present economic climate, are not assured.

Due to the economic situation, US insurer TransAmerica withdrew from a USD 2 billion major agreement with Tata Consultancy Services of India last month. TCS has already hired 2,200 TransAmerica personnel, who will be required for other projects once the transfer is complete.

The current economic year was already predicted to be a disaster. In Q4, Indian IT organisations reported persistent client caution and macroeconomic uncertainty, and few were positive about Q1.

JPMorgan has been heading the pessimistic parade. Based on talks with 15 Information Technology firms, the brokerage concluded in a June report that demand for IT services had denied further in June.

Project delays, halts, and cancellations look certain to continue. According to analyst Ankur Rudra in the paper, more competition for a smaller pie may result in lower win rates, prices, and worsening agreement conditions.

Rudra forecasts that the sector will not recover for the next six to nine months, implying that FY24 will be a washout for India.

Accenture has already raised this concern. As part of a planned restructure, the company’s staff denied for the first time since the outbreak began, and it said it saw no reason to hire in the fourth quarter. Headcount increase in IT is a leading indicator of what corporations expect in terms of demand. A declining or stagnant headcount is not a positive indicator.

Though Accenture’s statistics aren’t a similar match for Indian IT, experts make some forecasts based on them.

According to stockbroker Motilal Oswal, Accenture’s management underlined the impact on the demand environment of poor macro, delays in small and discretionary agreements, and a drop in deal price in a few industries, all of which signal a drag on near-term growth for India’s IT coverage.

The only good side for Q1 FY24 will be the influx of higher consolidation agreements. India’s Infosys and TCS, and Cognizant, have currently acquired comparatively higher consolidation victories.

In a historically strong quarter, a slowish discretionary spending environment combined with project pullbacks in financial services and telecom will lead to a sequential revenue fall to marginal growth for tier-I IT businesses in India. According to stockbroker Kotak Institutional Equities, a surge in cost-cutting and consolidation transactions may result in strong contract wins for a few big IT businesses in India.

Conclusion.

During the epidemic, IT growth in India increased as corporations spent more on smaller initiatives. Now that the deluge of minor agreements has subsided, the market is left with massive deals. However, because of how the various partnerships function, the move has had an impact on IT-service income. The lack of modest agreements in Indian IT would exacerbate an already dismal FY24.