Telcos hanging up on tech spending will hurt IT firms

While the top five Indian IT services firms have already warned of a muted year ahead, a slowdown in tech spending by global telecom operators could deliver them yet another blow this fiscal year, given that telecommunications accounts for more than 10% of the top five IT firms’ annual revenue.

A Mint analysis of these firms—Tata Consultancy Services (TCS), Infosys, HCL Technologies, Wipro and Tech Mahindra—revealed that revenue from the communications and media vertical was down nearly 3% from $8.49 billion in FY23 to $8.25 billion in FY24.

Tech Mahindra was almost single-handedly responsible for this decline, having lost $320 million or 12.1% in annual revenue from telecom clients in FY24.

A consensus of three analysts compiled by Mint projected a further downside of 3-5% in telecom revenue for the industry’s top five firms in FY25. At this rate, these firms could lose more than $400 million in net revenue from telecom clients – a substantial figure, given the already weak revenue growth projections for the fiscal year.

For context, Infosys expects overall revenue to grow 1-3% in constant currency terms, while HCL Technologies expects 3-5% revenue growth. Wipro, which only provides quarterly guidance, expects June-quarter revenue to decline 1.5% or grow 0.5% at best.

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To be sure, the top five firms rely on telecom clients to varying degrees. Tech Mahindra earns more than one-third of its net revenue (36.9%) from telecom clients and could thus be hit the hardest if the projected revenue slowdown in this vertical materialises.

Infosys draws 12.3% of its annual revenue from telecom clients, while HCL Technologies gets 9.2% of its revenue from them. TCS earns 6.8% of its net revenue from telecom deals, while Wipro has the smallest telecom practice of the top five, with the sector accounting for just 4.2% of its net revenue. Wipro is also the only firm among the five for which telecom deals account for less than $1 billion in net annual revenue.

Bleak outlook

While Infosys and HCL Technologies did post revenue growth of 6.1% and 5.2%, respectively, from the telecom vertical, much of this was driven by large one-off deals.

Last August, Infosys won a $1.64-billion digital transformation deal from European telecom group Liberty. The same month, HCL won its largest deal ever from US telecom firm Verizon to manage digital services for its enterprise division.

Going forward, however, winning such large deals could be harder, industry experts said.

“The macroeconomic environment is such that most telecom firms are looking at large, long-duration deals — but ones that are deferred," said Omkar Tanksale, senior equity analyst at brokerage firm Axis Securities. "This is because most telecom firms have already undertaken large capital expenditures for 5G deployment and AI adoption. With a low capex cycle expected in FY25, telecom revenue for IT firms could remain low."

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Tanksale’s evaluation is on point. Industry body Nasscom warned in its 2024 Strategic Review that “declining revenue profile of telecom companies, and unmaterialised investments in 5G" could slow down tech spending by telcos, apart from macroeconomic headwinds.

Nasscom also highlighted that telecom, one of the core sectors for India’s IT services industry, is growing 40% slower than the rest of the industry.

Queries emailed to TCS, Infosys, HCL Technologies, Wipro and Tech Mahindra on their present projection of revenue from telecom clients did not elicit immediate responses.

Challenges

“The biggest challenge is the lack of use-case development, because of which adoption of private 5G infrastructure has been stunted," said Prashant Singhal, leader for tech, media and telecom as well as emerging markets at consultancy firm EY Global, said.

"Tech spending on adoption of captive 5G networks has been slow in North America due to macroeconomic concerns across multiple industries—including manufacturing, banking and healthcare. This weakness is also unlikely to disappear in the near term, so tech spends from the telecom vertical will likely remain weak through FY25 as well."

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Apurva Prasad, vice-president of institutional research at brokerage firm HDFC Securities, said several large telecom carriers worldwide were carrying out margin-optimisation exercises.

“There is a lot more thrust on improving margins with cost-cutting programmes that most such firms have already announced. This is why you will see enterprise clients of the telecom industry underperform compared to other industry verticals," he said. "Barring specific large deals, the volume and flow of deal announcements in the telecom vertical was much higher about a year-and-a-half ago."

Prasad also cautioned that the nature of future telecom deals could be very different from what the IT services industry has seen so far.

“Most deals now will be on the cost optimisation side," he said. "Plus, there could be far greater competition for large deals from global rivals such as Accenture and Cognizant, given that there will be fewer such deals."

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