Prabhudas Lilladher Q1CY15 IT Sector Report
Prabhudas Lilladher Private Ltd has issued the following Q1CY15 report for the IT sector:
Sector Update – Weakness in Q1CY15, Commentary for CY15 optimistic
(DISCLAIMER: This is an unedited report. Techspirit is not responsible for poor grammar, spelling errors, inaccuracies or bias.)
We attended the Conference Call of “ISG Outsourcing” (TPI) for Q1CY15. The quarter witnessed weakness in ACV ($5.1bn) due to tougher comp and lower large deal closure. However, the commentary for CY15 continues to be healthy as ISG sees pick-up in demand in H2CY15. There is no slackness in demand environment. They see faster than expected cloud adoption, pricing pressure in select few service line, and increased penetration by Indian Heritage Vendor in IMS and Europe.
Weak Q1CY15 – Lower number of large deals drive lowest Q1 in 10 years: According to ISG forecast, broader market ACV weakned (-18% YoY, -22% QoQ), due to lower number of large deals resulting in weakest Q1 in 10 years. ISG expects weakness to persist in Q2CY15, but expectations for H2CY15 and CY15 continue to be strong.
Pricing pressure in commoditized business: ISG highlighted about pricing pressure in commoditized business. They see ~20% of drop in pricing in segments like Data Centre and IMS. Faster adoption of cloud and increased penetration of Indian Heritage Vendor in IMS continue to mount pressure on incumbents. However, many outsourcing decisions, especially from matured clients, are not entirely based on pricing. Clients are also looking for improved SLAs, and differentiated value proposition to induct a new vendor.
What outsourcing maturity means?: There is no loyalty between clients with vendor. 4th-5th generation outsourcing deals are structured in a fashion wherein switching vendors is an easy task. Hence, the cycle of restructuring deals are difficult to predict. Analytics, Robotics, and Cloud – impact the managed service marketplace more rapidly and broadly than anticipated. Clients look to benchmarking to take advantage.
Indian v/s American (Heritage Vendors) – Who will win Digital battle?: According to ISG, IHV have margin levers and surplus cash to invest in business. Moreover, IHVs are nimble footed and developed deep domain expertise in few verticals. However, there is no clear leader in the same currently. Nevertheless, Accenture’s Consulting legacy is helping it to have edge in Digital battle.
Healthcare and Energy strong in Americas, FS strong in EMEA & APAC: Among the verticals, Healthcare and Energy grew strongly in Americas. In APAC and EMEA, manufacturing witnessed strong growth.
Among mid-caps Mindtree and KPIT Technologies get mention: Among the mid-caps in our coverage universe, Mindtree (EMEA) and KPIT Technologies (Americas) got mentioned in “The Breakthrough 10 Sourcing Standouts”.
Continues to prefer – Infosys, Tech Mahindra, and TCS: CY15 deal closures are expected to pick-up in H2CY15. According to ISG, swifter than expected adoption of Digital continues to disrupt marketplace.