Home / Markets / Mark To Market /  Ahead of TCS result, ISG warns of sharp slowdown in financial services deals

Mumbai: An analysis of outsourcing contracts by Information Services Group (ISG) indicates a notable slowdown in deal activity. Total commercial outsourcing contracts with annual contract value of $5 million or more declined 5% in the quarter ending June as enterprises reduced spending on managed services.

Importantly, segmental analysis shows a notable decline in financial services deal activity where large Indian IT companies have significant presence.

Deal activity in financial services dropped 11% in six months to June. “Contrary to consensus expectations, deal activity in Financial Services was a major disappointment. This was ascribed to low interest rates and delays witnessed in the shift to the remote work model, led by compliance/security requirements, etc.," analysts at Motilal Oswal Financial Services Ltd said in a note.

Both Tata Consultancy Services Ltd (TCS) and Infosys Ltd derive more than 30% of their revenues from banking, financial services and insurance (BFSI) vertical.

On the positive side, enterprises maintained spending on digital transformation efforts. This is reflective in a 7% growth in cloud-based as-a-service sourcing in quarter ending June.

Similarly overall deal activity in Americas, key markets for both TCS and Infosys, remained decent. “The Americas was the only region to show growth in the second quarter of 2020, although it was helped by a favorable comparison to a weak second quarter last year," ISG said in a statement. Overall deal activity (in terms of contract value) grew 6.5% in the Americas.

Still, investors will be eager to know demand trends in the financial services when TCS releases results later in the day.

ISG warns deal activity can remain weak in near term, notably in large contracts. It projects a double digit decline in overall contract values in financial services, partly impacted by a higher base of the previous year.

“We are surprised with sharp contraction in financial services deal activity as per ISG database. The decline is contrary to positive commentary in demand from IT service providers. ISG is also predicting a slower recovery, albeit marginal, in deal activity compared to earlier expectation. The broad outlook highlighted by ISG is broadly consistent with its earlier stance," analysts at Kotak Institutional Equities Research said in a note.

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