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Lull in deal wins

An analysis of the publicly announced deal wins in 3QFY24 of the key IT companies reveals a surprising dip in wins from North America compared to the earlier quarters. In addition, no mega deals have been announced compared to six in the previous quarter. While we acknowledge that publicly announced deal wins only account for a small fraction of overall deal wins, modest announcements, especially in the troubled North American geography, are surprising (as companies highlight record pipelines) and a tad worrying. Infosys continues to be our preferred pick.

Weak deal-win announcements in North America geo

Exhibit 1 indicates a list of deals announced by key IT companies in the Dec-23 quarter. Most deals are from Europe-headquartered clients. Only three out of 29 are from North America (Exhibit 2), significantly lower than the average of ~8 in the last seven quarters. The number of deals from Europe and RoW is roughly similar to their last seven-quarter averages. None of the three deals announced in North America are from the crucial BFSI, hi-tech, manufacturing, retail and telecom verticals. Weak deal wins in the North America geo indicates that the trend of moderation of in the number of deal wins/TCV from the region as witnessed in the disclosures of Infosys and TCS (Exhibits 3 and 4) will continue.

A lack of mega-deal announcements unlike in Sep-23 quarter is a letdown

The Sep-23 quarter was exciting, with several mega-deal announcements (Exhibit 5). The commentary about a healthy pipeline by companies indicated that more could follow in the Dec-23 quarter. However, not a single mega deal has been announced by Indian IT during the quarter. A lack of mega-deals is a concern and will be a key focus point for investors going into the Mar-24 quarter.

Near-term set-up does not look promising enough to support FY2025 estimates

The recent run-up in stock prices indicates heavy expectations of a recovery in discretionary spending in CY2024E. A quick recovery in 1HCY24 does not appear likely. We bake in 0.8-4.2% qoq organic growth for the Jun-24E quarter for leaders, compared with a revenue decline of 1.3% to growth of 2.9% in the Jun-23 quarter (Exhibit 6). This requires support from both recovery in discretionary spending and large/mega-deal ramp-ups. Enterprises’ focus on cost reduction and weak deal-win announcements, particularly in North America, do not inspire confidence and lead to downside risks to growth estimates. 

Infosys is our preferred pick

IT stocks have re-rated in the last several months on rate-cut hopes, leading to expensive valuations for many. Infosys provides comfort around growth acceleration and upside potential in the event of a significant recovery in discretionary spending, and it also trades at reasonable valuations. Upsides are moderate in TCS and HCLT after the recent run-up in stock prices.

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