Technology Sector Update - ISG data suggest further pick up in deal signings By Motilal Oswal
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ISG data suggest further pick up in deal signings
ISG, leading global consultants and advisor to the IT Services industry, hosted their quarterly industry outlook on 7th Jul’21. Overall, the commentary points to strength in IT Services spends, led by Cloud migration. Here are the key takeaways from the call:
Robust increase in global ACV
* The annual contract value (ACV) increased by 12% QoQ and 32% YoY in 2QCY21, with As-a-Service (AAS) up 13% QoQ and 38% YoY and Managed Services up 8% QoQ and 23% YoY.
* Growth in AAS was driven by 29% YoY (for 1HCY21) growth in Infrastructure-asa-Service (IaaS) on account of a robust performance from hyperscalers. Growth in Managed Services was led by 48% YoY growth in the BPO business (on a lower base).
* Americas ACV was up a modest 25% YoY. EMEA grew 31% YoY, led by 45% YoY growth in AAS, which in turn was led by large deals and a favorable base.
Big jump in CY21 Managed Services guidance
* ISG guided at a 9% YoY increase in Managed Services (traditional IT Services) for CY21, up 400bp from its 1Q guidance, due to continued strength in the medium and large deal pipeline. This implies the strongest YoY performance in Managed Services in at least the last seven years.
* AAS to remain strong (+21% YoY, v/s 1QCY21 guidance of +18% YoY), benefitting from IaaS spend. Software-as-a-Service (SaaS) remains a drag.
* While 1QCY21 saw a large volume of smaller deals, 2Q had more midrange deals (USD20-40m). ISG expects volumes of mega deals to rise further in 3QCY21.
Pricing stable despite an increase in talent crunch
* IT providers are seeing huge competition for talent in CY21. The ability to staff projects with resources is likely to pose a key challenge.
* There has been an increased demand for relevant skills. Companies are also hiring college graduates and this should reduce the dependence on subcontractors.
* However, pricing has remained stable despite an increase in the cost of hiring.
Growth in Engineering Services and M&A is picking up
* The overall market is up, with deal volumes at the highest level ever. The vertical has also seen a significant increase in M&A activity, as consolidation is taking place.
* Currently, the average ER&D ACV is USD15m. However, clients have started to engage more than before and this should only increase. We see this as supportive of our positive view on the ER&D vertical and have a Buy rating on LTTS and CYL
Valuation and view; expect strong double-digit growth to continue
* The strong commentary on both AAS and Managed Services is encouraging for the Indian IT Services industry from a revenue perspective. We build in doubledigit growth across both large- and midcap IT Services vendors.
* We continue to see Cloud – coupled with transitional cost takeout deals – as major themes for the IT Services industry from a near- to medium-term perspective.
* We continue with our bottom-up stance for sectoral picks. Among Tier I players, we like INFO and HCLT on expectations of industry-leading growth. From the Tier II pack, we prefer LTTS, MPHL, CYL, and ZENT given their industry-relevant portfolios and attractive valuations.
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