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Positive CY21 commentary from IT industry advisors

Growth outlook continues to improve

Gartner and ISG, leading global consultants and advisors to the IT Services industry, hosted their quarterly industry outlook calls on 12 Jan’21. The commentary points to continuing strength in IT Services spends, led by Cloud migration. Here are the key takeaways from the calls:

ISG index exited CY20 at fresh high; expect double-digit deal growth in CY21

Managed services continue to surprise on the upside

* ACV (annual contract value)/as-a-service (AAS)/managed services increased 13%/22%/3% YoY in 4QCY20.

* While Cloud drove the strong performance for AAS across regions, 4QCY20 growth in managed services was primarily due to large deals wins by Indian IT Services majors in Europe (+14% YoY), as Americas remained muted (-17% YoY).

* AAS now commands 56% share of total ACV, as the market moves towards increased adoption of hyperscalers. Within AAS, SaaS has suffered from weak demand in CY20, but is expected to improve in CY21, while IaaS continues to draw significant spends as public Cloud scales up.

Expect TCV to grow in double-digits in CY21

* ISG expects CY21 to witness over 12% YoY growth, led by continued momentum in AAS (+20% YoY) and recovery in managed services (+3% YoY) as corporates migrate towards the Cloud. Managed services continue to witness captive monetization deals, and ISG expects this trend to continue.

* It expects weakness in the US to ease in 1Q/2QCY21 as a delayed deal pipeline starts converting into business in 1Q or early 2Q

Gartner revises upwards its CY21 IT Services spending forecast by 200bp

* Gartner’s IT spending commentary during its 4QCY20 call indicated a better tech environment in CY21 as it expected broad-based IT spends across the region.

* It also indicated Cloud and related services to be the fastest growing services for CY19-24, therefore spearheading growth for the IT Services industry.

* Now, on the back of better growth environment, it has revised upwards its growth in CY21 IT Services spending to 6% YoY from 4.1% earlier (despite an upward revision in the CY20 estimate).

Continue to see strong double-digit growth for Indian IT in FY22

* Strong commentary in both AAS and managed services is encouraging from an Indian IT Services industry revenue perspective as we built in a double-digit growth across both large and mid-cap IT Services vendors.

* We continue to see Cloud as a major theme for the IT Services industry from a near to medium term perspective.

* IDC’s commentary on a good momentum in the BFSI vertical should aid growth for companies under our coverage.

* We like Infosys/HCL Technologies among Tier I players and Persistent Systems/Mphasis in Tier II IT. This is attributable to their robust business models, high return ratios, and attractive valuation

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