IT midcaps tap into transformational deals, digital play drives higher TCV

Transformational deals, earlier a preserve of Information Technology (IT) large caps, are trickling into the midcap space with increasing number of players reporting transformational and incremental deals from existing customers. For some companies, the last quarter of the financial year (FY) 2019 saw a slew of transformational deals coming in from across sectors.

In the January- March quarter, Larsen and Toubro Infotech (LTI) reported multi-year multi-million dollar transformation deals with an engineering equipment manager and a reinsurer which helped the company poakcet a total contract value (TCV) of over $100 million. Hexaware reported a quarter of largely customer transformation and cloud deals unlike the automation-heavy deals of the past. Pune-based Zensar reported strong growth driven by healthy deal wins as well.

A Gartner report says it's not true that bigger players alone drive transformation. If the scale of transformation is big, however, the bigger ones have better capacities compared to midsized players as it requires a significant investment. “We now see more demand for midsized players as they can bring more value for money. Many midsized companies now have the ability to differentiate themselves from the rest as they bring innovative solutions and services for customers,” said D D Mishra, Senior Director Analyst, Gartner.

The report notes that customers in mature markets are dealing with a higher number of relatively-unknown players than established ones. Consequently, projects have evolved towards service integration management (SIAM) and Multisource Service integration (MSI) models, which are gaining in popularity.

Midsized players are often the part of an ecosystem, with large players trying to complement rather than compete. These changes make midsized organisations and startups more valuable and make them candidates for market consolidation, thereby driving more inorganic growth for some larger ones, said Mishra.

“Around 30-40 per cent deals signed by midcap IT service providers in the last eight quarters have elements of digital transformation or digital customer experience involved. The average deal size for these transactions was between $10-20 million with some providers signing contracts worth as high as $35 million or as low as $2 million in TCV,” said Vishwakumar Nandagopal, Director and head of India operations, ISG.

ISG also found that growth in contracts that involve midcap service providers are between 8 to 10 per cent, which is not very high growth compared to the traditional services growth.

Zensar reported $750 million worth of TCV in FY19 -- compared to about $500 million the previous year -- with 60 per cent of the deals being $10-million plus across verticals. A third of these deals have a timeline of five to seven years.

"In order to be relevant (to customers), we underwent our own (digital) transformation. This has earned us customer trust. We see the trend of mid-size deals with increased deal volumes in the recent past. Pricing models are dependent on the outcomes customers are able to realize, which directly influences the deal value too,"said Sandeep Kishore, CEO and MD, Zensar Technologies.

While these deals have continued the pressure on acquiring talent and subcontracting for these midcaps, the fact that many have moved out of PoCs to actual long-term deals bodes well for the players from a long term revenue perspective.

Sunil Sapre, CFO, Persistent Systems notes that with digital comprising 24.4 per cent of the revenue in Q4, it is clear that clients have moved beyond proof-of-concept projects. “Longer duration deals are coming in and transformational deals are happening,” said Sapre.

Apurva Prasad, AVP Research, HDFC Securities says that the market itself has expanded to provide midcaps more opportunities. “On one hand you have the backend and core transformation deals which drive value and there are the customer experience transformation deals that drive volume. Basically, the $10-25 million deal bracket has opened up, allowing midcaps to compete at par with large caps,” said Prasad.

That said, billion-dollar deals still continue to be a preserve of large caps like TCS and Infosys despite a few sporadic deals reported by other players.