As IT Giants Clinch Billion-Dollar Deals, Investor Prudence Suggested Over Immediate Returns

Prominent IT companies have recently sealed monumental deals that hold profound implications for the industry's trajectory. Tata Consultancy Services (TCS), Infosys, Wipro, and HCLTech have each etched their names with significant accomplishments in landing both large and mega deals this year. But what does this mean for investors?

In June, Tata Consultancy Services (TCS) unveiled an ambitious partnership expansion with the UK's largest workplace pension scheme, the National Employment Savings Trust (NEST). The GBP 840 million (approximately USD 1.1 billion) agreement spans a preliminary 10-year period and aims to revolutionize administrative services for an elevated member experience. If extended across its full 18-year duration, the contract's maximum estimated worth could reach GBP 1.5 billion (about USD 1.9 billion). The agreement encompasses a minimum 10-year term, with potential extensions of up to 5 years and an additional 3-year exit option.

If extended across its full 18-year duration, TCS' NEST contract's maximum estimated worth could reach GBP 1.5 billion (about USD 1.9 billion). 

This transformative alliance follows the termination of the previous contract held by French IT firm Atos, abbreviated after just two years of an envisioned 18-year commitment.

Meanwhile, HCLTech last week unveiled a staggering USD 2.1 billion agreement with Verizon. The anticipation of a dynamic future is expected as HCLTech envisages securing more substantial mega deals in the forthcoming quarters, riding the momentum of the Verizon deal.

Following the triumphant acquisition of the Verizon contract, HCLTech's CEO C Vijayakumar revealed a robust pipeline since Q1 FY24, coinciding with the company's observation of an unprecedented surge in its order book, setting an "all-time high" record.

In an interview with a leading media house, Vijayakumar expressed confidence in the ongoing quarter (Q2 FY24) to contribute significantly to the company's bookings, propelling a trajectory of progressively enhanced growth. He underlined the prospect of fulfilling the projected 6-8 per cent year-on-year (CC revenue growth) guidance for the fiscal year (FY24), propelled by the current trajectory and prospective developments.

Infosys made waves this week by announcing a substantial five-year mega deal, initially valued at EUR 1.5 billion (~USD 1.64 billion), with Europe-based telecom and communications giant Liberty Global. The collaboration, an extension of their February 2020 partnership, will see Infosys take charge of the design and operation of Liberty Global's Horizon entertainment and connectivity platforms, integrating their cutting-edge Topaz AI solutions.

The agreement holds the potential to extend up to eight years, a move that could elevate the total contract value to a remarkable EUR 2.3 billion (~USD 2.5 billion). This deal marks Infosys' third significant announcement in recent months. Notably, this Liberty Global contract supersedes even Infosys' massive USD 1.5 billion deal with global energy leader BP, secured in May and spanning five years.

Infosys' Liberty Global contract supersedes even the massive USD 1.5 billion deal with global energy leader BP, secured in May and spanning five years.

These strategic triumphs come in the backdrop of Infosys' revision of fiscal 2024 revenue projections, which are now expected to expand by 1-3.5 per cent in constant currency, underlining the challenges posed by global macroeconomic factors.

Last fiscal year, Infosys signed 95 large deals worth USD 9.8 billion.

Among leading IT firms, agreements worth USD 100 million or more are commonly termed as "large deals." Deals surpassing the USD 500 million-mark are called "mega deals."

During Q1 FY24 results, Wipro's CEO Thierry Delaprote highlighted significant strides in large deals, closing contracts totaling USD 1.2 billion – a 9 per cent year-on-year (YoY) growth and the highest in eight quarters. The quarter saw 10 deals surpassing USD 30 million in Total Contract Value (TCV), contributing to a TCV of USD 3.7 billion. Notably, two new accounts exceeding USD 100 million in revenue were added.

This strategic shift for Wipro involves reducing client numbers by 100 while emphasising USD 20 million and USD 100 million range customers. Despite fewer deals, Q1 FY24's TCV surged. But it will be interesting to see the company’s deal announcements in Q2.

Long-Term Vision Amidst Quarterly Realities

Despite the monumental deal-making, a thought-provoking dichotomy emerges—these multi-billion-dollar deals are stretched over a minimum of five years, thus tempering their immediate quarterly revenue impact. In this context, the significance of smaller deals, even up to USD 100 million, comes to the fore as a pivotal factor in showcasing quarterly revenue growth. Industry observers underscore that this robust deal-making spree is a clear indicator of the IT sector's meaningful growth trajectory, despite the potential lack of immediate impact.

In light of these developments, investment experts stress the importance of adopting a long-term perspective. While the recent accomplishments of IT giants resonate loudly, the prudent approach is recommended, particularly within the IT domain, over the upcoming six-month period. This segment isn't for those wanting some rapid returns.