Aventis IT Services Valuations Index

Welcome to the Aventis IT Services Valuations Index, a valuable one-stop resource designed to help you track the performance of the global IT services industry.

From an initial database of 800 IT services companies, we have carefully selected 187 publicly listed IT services companies to constitute the Aventis IT Services Valuations index. Our index will bring you the most interesting and up-to-date insights about IT services valuation multiples, global performance trends, and sentiment of the IT services industry.

So, let’s dive in!

Who is this IT Services Valuations index for?

Our index constitutes small, medium, and large enterprises, making it one of the most comprehensive in the industry. We believe that the Aventis IT Services index will best serve the interests, and has been curated with the following reader groups in mind:

• Founders and entrepreneurs running an IT services company planning a business sale or exit, identify growth opportunities or benchmarking their performance against industry standards
• VC and PE investors active in the tech and IT services space trying to evaluate the market landscape
• M&A professionals and corporate development teams interested in IT and tech acquisitions
• Students, academics, and IT enthusiasts

Aventis IT Services index description

Aventis IT Services index is designed to track the performance of companies providing IT consulting and software development services.

The majority of the companies in our index fall into one of the categories or have a number of business lines in parallel:

1. Software development: Designing, coding, and maintaining software applications.
2. IT Consulting: Companies providing digital transformation, cloud migration, and IT strategy
3. Software integrators: partners of SAP, Microsoft, Salesforce, etc.
4. Managed Services Providers (MSPs): Delivering outsourced IT support and management
5. Value Added Resellers (VARs): Reselling products with added features or services.

Methodology

Countries included: Australia, Austria, Belgium, Bulgaria, Canada, Denmark, Finland, France, Germany, Greece, Hungary, India, Indonesia, Ireland, Israel, Italy, Luxembourg, Morocco, Netherlands, Norway, Pakistan, Poland, Portugal, Romania, Singapore, South Africa, Spain, Sweden, Switzerland, United Kingdom, United States

Revenue size: at least $10 million as of 3 June 2024

The index started with 95 public IT services companies on January 1, 2015, and had 187 companies as constituents on Aug 30, 2024.

Aventis IT Services Valuations Index

Due to the fact that the IT services industry is cyclical, the Aventis IT Services index showed a steady rise between 2015 and 2018, with the index growing from 100 pts to 245 pts. This was followed by a plateau phase and decline in 2019.

Over the analyzed period, our IT Services index grew by 6x, i.e., a compounded growth rate of around 21%. During the same period, the index (excluding Indian IT services companies) grew by only 4x, i.e., a compounded growth rate of ~15%

The strong performance of the India-inclusive index suggests that investments in Indian IT services companies could yield higher returns, albeit with potentially higher volatility.

The high valuation of Indian IT services companies, as compared to their global peers, can be attributed to several strategic and structural advantages beyond the emerging market label.

• Cost efficiency & scalability: Indian IT firms maintain cost structures significantly lower than their global competitors, mainly due to labor arbitrage. This allows them to offer competitive pricing while maintaining healthy profit margins. Coupled with India’s massive talent pool, these companies can scale rapidly and offer large-scale project capabilities, which is highly attractive to global clients.
• Global delivery model: Indian IT firms pioneered the global delivery model, enabling 24/7 work cycles and faster project delivery by leveraging teams across different time zones. This model is particularly effective for complex IT services such as consulting, application development, and infrastructure management.
• One of the largest hubs for IT outsourcing: Specialization in outsourcing helps Indian firms generate high, recurring revenue streams from long-term contracts
• Resilience & adaptability: Indian IT services companies have shown resilience in facing global economic slowdowns, geopolitical shifts, and the recent COVID-19 pandemic
• Digital transformation & cloud services: Many of these firms have aggressively pivoted toward high-growth areas like digital transformation, AI, cloud computing, and data analytics

To better understand the performance of the IT services industry, we can compartmentalize it into three phases, each with its distinct characteristics and key drivers:

Pre-2020: Stable and rationale growth phase of IT services

The period between 2015 and 2019 was characterized by the rise of digital transformation efforts by corporations. The demand to shift to cloud computing and improve existing infrastructure made IT services companies worthy beneficiaries of more business from existing and new clients.

This translated into higher revenues and stable profitability margins, pushing the Aventis IT services index slowly but stably higher from 100 points to 245 points, a roughly 25% compounded annual growth in four years.

2020-22: Disruption and consequent hype phase

The global pandemic in 2020 coerced corporations to adjust to remote working, and this was no easy change. As lockdowns and uncertainty kicked in, global asset prices took a hit, and IT services were no exception. Aventis IT services valuations index was uprooted from its stable and growing phase and experienced a crash of roughly 35% between February and March 2020.

However, the IT services industry quickly recovered from these lows. Over the next two years, Aventis IT services peaked at an all-time high of 661 points before taking a breather. We attribute the reason for this rapid recovery to the following:

• The demand for IT services increased massively during the pandemic as corporations raced to ensure they had the necessary tech infrastructure to support the work-from-home revolution.
• This phase was also characterized by high YoY revenue growth for IT services companies, as shown in our research on IT services valuation multiples.
• Central banks globally focussed on stimulating the economy to avoid a recessionary spell, and this prompted quantitative easing through lower interest rates.
• Interest rates and cost of capital are inversely related to the valuation of a company, so as the interest rates went down, valuations of IT services companies boomed

Post-2022: New macroeconomic reality for IT services

Even though inflation was eating into companies’ net profits, IT services have done a fairly good job of passing on this cost increase to the clients on the back of huge demand. The AI hype also allowed IT services companies to jump and get a piece of the action by providing services related to AI cloud transformation, AI consulting, and more. Thus justifying why the IT services index is still holding up at elevated levels, but there is no guarantee that this can be sustained.

IT services is a cyclical industry, and a plateau or decline follows every growth phase. Aventis IT services index experienced volatility during 2023 but is still close to its all-time high.

There are several reasons for this:

• With rampant inflation across the world, central banks pivoted to quantitative tightening, thereby increasing interest rates that affected the valuations of IT services companies negatively
• The increasing interest rates also limit the ability of IT services companies to borrow cheaply and invest in growth projects to maximize revenue and, eventually, stock prices.
• However, the ongoing hype and advancements in artificial intelligence present significant opportunities for innovation and efficiency, which could lead to substantial cost reductions and improved profit margins.
• Additionally, the prospects for revenue growth remain promising, driven by the continuous demand for technological advancements and digital transformation.
• As of June 2024, the European Central Bank (ECB) announced its first interest rate cut, but this is in no way a signal that the meetings of other global central banks will follow suit.

As a result, investors may anticipate another growth cycle on the horizon, balancing the current slowdown with the potential benefits of AI and cost efficiencies.

The chart above effectively highlights how anticipated revenue growth in the next twelve months (NTM) influences valuation multiples in the IT services sector. From 2020, the EV/EBITDA multiple significantly increased, peaking around mid-2021, which aligns with a substantial rise in NTM revenue growth forecasts.