Could a weak order book act as a speed bump to Indian IT’s growth?

India’s top four software services companies—Tata Consultancy Services Ltd, Infosys Ltd, HCL Technologies Ltd, and Wipro—have seen their order books decline in the first half of FY25 compared to the first six months of the previous fiscal, a Mint analysis of the companies’ financials showed.

This development comes as a potential alert at a time when the companies themselves have put out positive revenue guidance for the current fiscal and are even hiring more people.

Top gun TCS’s order book—technically called total contract value or TCV—fell to $16.9 billion in April-September 2024 from $21.4 billion April-September 2023. For third-largest HCL, the TCV dropped to $4.18 billion from $5.54 billion in the same period. To be sure, for HCLTech, TCV refers to new deal wins.

And for Wipro, India’s fourth-largest IT services company, the TCV fell from $7.51 billion in H1FY24 to $6.84 billion in H1FY25.

Second largest Infosys doesn’t declare its TCV, and instead puts out its aggregate of large deals—worth more than $50 million each. The company’s aggregate large deal value contracted to $6.5 billion in April-September 2024 period from $10 billion in the first six months of the previous fiscal.

Absence of mega deals

TCS was hit by the absence of ‘mega deals’ worth more than $1 billion in H1FY25, but the company’s CEO said that TCV always has some lumpiness, and sometimes deals take longer to close.

“We have always been maintaining that $7 billion to $9 billion TCV is a comfort range and particularly in the absence of a mega deal,” K. Krithivasan, CEO of TCS, said in the company’s post-earnings conference with analysts on 10 October. “If you were comparing with last year Q2, we had mega deals amounting to almost $2 billion. So, in the absence of those mega deals, I think it’s a comfortable number.”

Infosys’s fall in large deals was somewhat balanced by a jump in small deals valued less than $50 million each. “Deal wins during the quarter were strong, which coupled with an expanding pipeline of small deals gives us visibility for future growth,” said Salil Parekh, CEO of Infosys, as part of his prepared remarks in the company’s post-earnings interaction with analysts on 17 October.

Infosys’s deals valued more than $1 million jumped to 985 in the September 2024 quarter against 951 in the year-ago period. Deals higher than $10 million dipped marginally to 307 for the quarter as against 312 in the year-ago period.

Not all discretionary

However, at least one analyst said these small deals were not all discretionary deals, which eluded India’s largest homegrown companies last year causing India’s $254 billion technology sector to grow at its slowest pace after clients pulled back spending on technologies.

Discretionary deals are non-essential projects for clients of IT services companies.

“Discretionary deals make up a portion of the smaller deals but not all of it. We believe this is noteworthy because weakness in smaller deals, particularly discretionary deals, has negatively impacted industry growth for a few years now,” said BMO Capital Markets analyst Keith Bachman in a note dated 17 October. “INFY sounded more bullish than TCS as TCS did not call out this trend. We think it would be a positive for the overall IT services industry if small deal growth were to continue.”

While Wipro’s TCV contracted, its large deal signings—deals worth more than $30 million—rose marginally to $2.64 billion in H1FY25 from $2.48 billion in the first six months of the previous fiscal. The company attributed this to its engagement with clients and a consulting-led approach.

“If you look at it in the context of a large deal, what is very important for us is to be proactive with our clients,” said Srinivas Pallia, CEO of Wipro, in a response to a question at the company’s post-earnings interaction with analysts on 17 October. ‘Second, we have to lead with consulting and infuse AI or AI-powered solutions. So, the industry and cross-industry solutions that we have also help us solution it right for the client and customize it right for the client.”

A high inflow of orders could bolster a turnaround for Wipro, which ended last year with a full-year revenue decline.

Out of the top five homegrown IT services companies, only Infosys and Wipro Ltd disclose large order contract values. The remaining disclose total order values.

Past billion mark

For the No. 5 IT services company, Pune-headquartered Tech Mahindra Ltd, its order book crossed the billion-dollar mark with total order book size of $1.14 billion at the end of the first half of the fiscal. The comparable figure last fiscal was $999 million.

A low order book in the first half of the fiscal as compared with the last could put water on the growth that India’s top five software services companies are poised to achieve, especially as four of them increased headcount and two of them expect higher business in the remainder of the financial year.

However, a second analyst does not see a correlation with growth and low order bookings.

“Last year when these IT services companies were reporting higher order bookings and TCVs compared with now, the revenue did not pick up,” said the Mumbai-based analyst on condition of anonymity. “This year, it is the other way around. It is a very easy correlation to draw that larger deal TCVs will contribute to higher revenue or growth, but that does not play out in a one-on-one manner.”

“When IT services companies sign deals with clients, there is an estimate of potential revenue that they might earn on a yearly basis from these clients. However, if these clients decide to postpone tech projects or keep them on hold due to a bad macroeconomic environment, some of the assumptions that an IT services company might get a certain revenue at the end of a year from those clients may not hold true,” said the analyst.