Indian IT services providers are winning more digital deals, as clients look to transform workplaces, cut costs and automate projects, analysts said.
Software services exporters have forecast better growth in the year ahead after tepid first quarter results. The business outlook is improving as more companies invest in digital projects. Deal wins, which were soft initially, have picked up pace since late May, the analysts said.
“Pipeline is expanding in areas of cloud, workplace transformation, cost efficiency and automation,” said Apurva Prasad, an analyst at HDFC Securities. “Demand is expected to increase for services around digital channels, collaboration and workplace transformation.”
Technology companies are expected to report better margins in the second half of the year, according to Motilal Oswal Institutional Equities.
“Demand stabilization and waning of price discounts should aid revenue performance going forward… Clients’ interest in areas like Cloud, Virtualization, Digital, etc has also accelerated as a result of the (Covid-19) pandemic,” it said.
The equity research firm said appetite for technology deals in verticals like energy, manufacturing, aerospace and automotive will take longer to recover. However, banking, financial services and insurance (BFSI), telecom and CPG (consumer packaged goods) will “stabilize early”, it said.
Equirus Research said commentary by technology services firms has changed rapidly over the past quarter on improved demand expectations.
“Many players now expect to close FY21 on a better trajectory than guided earlier while they are building on a strong FY22,” it said in a note.
Service providers will, however, have to manage costs and profit margins better as clients expect them to pass on the benefits of the work from home model in the coming quarters, analysts said.
“While Work from Home efficiencies, lower travel costs are driving margins in the medium term, we believe that it will be passed on to clients through pricing reduction in the long term,” said Madhu Babu and Vaibhav Chechani of Centrum Broking. “With 50-60% of revenues coming from fixed price projects, we expect savings…being gradually passed on to the client,” the analysts added.
In a recent webinar, Infosys co-founder Narayana Murthy urged Indian technology companies to turn more competitive compared to global peers by taking advantage of the lower cost of software talent in the country.
“Since the cost of the software professional is much lower than in Europe or the US, the overall cost of the software project will come down significantly because there is maximum value add from India. Therefore, our margins are likely to improve and we can become more competitive in the marketplace by leaving a part of the margin on the table for our customers,” he said.
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