Notwithstanding the management commentary, top IT companies — TCS, Wipro, HCL and Infosys — are seeing the early impact of the looming recession on new deal additions for the first quarter of fiscal 2023. According to an analysis by credit rating agency CareEdge during Q1 FY23, there has been a slowdown in client addition (in greater than $1-million segment) to 60 in the June quarter compared to 91 client additions in the same segment in Q1 FY22.
Other early examples of deal slowdown include the fact that there has been a major slowdown in new deals coming from very high-value clients ($100 million and above).
Higher base effect
Deals over $10 million and above are contributing majorly to the growth in business seen in Q1. “In greater than $10-million bucket, 21 clients were added in Q1 — which compares with 22 clients added in the full FY21 marred by Covid-19 pandemic. Also, from a mix perspective, this bucket of $10 million and above contributed around more than one-third of all client additions in $1 million and above bucket for Q1 — this trend is similar to the one seen in full year FY22 wherein, more than one-third of total client additions in the category where of deal size greater than $10 million,” noted Swati Singh, Research Advisory Operations Analyst at CareEdge.
Singh partly attributes the slowdown in deal additions for $1 million and above clients to a higher base effect from the sudden post-pandemic ramp-up in Q1 FY22. Singh notes that sequentially as well, there has been an addition of 42 new clients in Q1 FY23, notwithstanding the fact that Q4s are weak from a seasonal perspective. Overall, the growth has been broad-based across all verticals, with BFSI continuing to have the largest share of client additions of one million plus deals.
For the highest value clientele ($100 million and above), Singh noted, “There is indeed a slowdown seen in Q1. Compared to 7–10 per cent of overall client additions being in the greater than $100-million bucket during FY22, in Q1 FY23, large clients constituted only around 5 per cent of all client additions in $1 million and above bucket.”
While CareEdge expects part of the client addition boom from FY22 to continue into FY23 as well, they “expect the broad trends in demand outlook and technology-driven spending to continue during FY23, however, uncertainties arising from global macro-economic slowdown and currency volatility can potentially play a spoilsport with respect to corporations spending on technology and may lead to postponing some of these spends,” Singh explained.
With significantly increased attrition levels across most players, there has been a surge in employee costs, Singh continued, adding that it will potentially impact the operating margins of the players. The impact of rising attrition levels was seen in the operating margins for Q1 FY23 as well, although most companies noted that the impact on margins has bottomed out and growth in operational margins is expected soon. Given the macro uncertainties, however, most companies did not commit a timeline for an uptick in operational margins.