Pricing woes prick IT Inc's bills

The fear of economic slowdown making customers wary of spending

 A squeeze on billing rates is clouding the outlook for India’s IT industry, which is feeling the pain of discount demands from its key financial sector clients.

Infosys, India’s No 2 software services exporter, said on Thursday pricing fell by 3.7 per cent in the June quarter from the previous quarter, and larger rival Tata Consultancy Services said prices fell about 1 per cent.

B G Srinivas, Infosys’ Head of Financial Services & Europe, told analysts the company faced pressure to discount from the financial sector, the firm’s biggest client segment.
“When the overall budgets are under pressure, there is definitely a move to get more for less, and in that context, of course, there’s competitive pressure as well,” he said.

“We believe that (economic) slowdown and lack of consolidation in the sector will manifest in reduced pricing power and profitability for TCS and the industry,” Kotak Institutional Equities Analyst Kawaljeet Saluja wrote in a note following the results.
Kotak downgraded both Infosys and TCS to “reduce” from “add.”

Existing players

“This mismatch between incremental growth available and higher growth aspiration for existing players is leading to aggressive pricing behaviour. Our channel checks indicate aggressive pricing by a Tier-1 player. Infosys’ pricing decline is also worrying,” he wrote.
Infosys and TCS lead India’s $100-billion-a-year IT and back-office outsourcing industry, which gets some three-quarters of its revenue from customers in the United States and Europe.

Economic volatility pushed Infosys to forecast lower-than-expected growth for the full fiscal year on Thursday, sending its shares down 8.4 per cent. The shares ended 1.5 per cent lower on Friday, while TCS gained 1.1 per cent. TCS, which posted better-than-expected quarterly profits after markets closed on Thursday, expects to beat industry group Nasscom’s export growth target of 11-14 per cent for this fiscal year, and downplayed concerns about pricing.

“From our side we have not seen the need to reduce the prices,” TCM Chief Financial Officer S Mahalingam told Reuters on Friday.

Irrational behaviour

“So far we have not seen any irrational behaviour from any of our competitors,” he said.
TCS said its decline in billing rates came from a change in the mix of services sold.
Infosys’ weak forecast prompted a slew of price target cuts and a few ratings downgrades.

Infosys’ “aggressive pricing and willingness to sacrifice margins should imply either a market share gain for Infosys or a significant pressure on sector margins,” Barclays wrote in a note, cutting its rating to equal-weight from overweight.