Indian IT sector faces a new threat with the squeezing of billing rates, making the sector face reduction demands from its financial sector customers.
The new reduction of the billing rates is obscuring the outlook for India’s IT sector and they are feeling the pain of discount demands from their key financial sector clients. As per Infosys, the no. 2 software industry in India stated that on 12th July 2012 the pricing has seen a fall of 3.7% in June quarter from Q1. On the other hand, Tata Consultancy Services claimed that prices fell by 1%.
Infosys’ Head of Financial Services and Europe, BG Srinivas told economic analysts about the company facing pressure to discount from the billing of the financial sector, the organization’s biggest client section. He stated that whenever the overall budget was under pressure, there is a move to get more for less simultaneously creating competitive pressure.
Chief Executive of Equirus Securities, Bhavin Shah predicted that Infosys would cut its full year growth forecasts by 5%, echoed the same feeling about the new reduction of the billing rates. He went on to say that given the weak environment where everyone competes for that small slice of the “growth pie,” it is inevitable more price erosion would occur in the future quarters.
Kotak Institutional Equities analyst, Kawaljeet Saluja, believes that this economical slowdown and lack of consolidation of resources would manifest into more reduced pricing and profitability of the TCS and related industries. Mr. Saluja said that this mismatch between incremental growth available and growth aspirations led for this aggressive pricing behavior among the major players. Both Infosys and TCS have $100 billion annual turnover as an IT and back-office outsourcing industry. They mostly generate their revenue from the customers of United States and Europe.
The volatile economy pushed Infosys into forecasting lower-than-expected growth for this fiscal year, plummeted its shares down by 8.4 %. The shares were recorded to be 1.5% lower on 13th July 2012. TCS gained 1.1%.
The posts by TCS, about their quarterly profits were better than expected, when the market closed on 12th July 2012. It is expected to beat industry group Nasscom’s export growth target of 11-14% in this fiscal year, whilst downplaying the concerns about pricing. S Mahalingam, Chief Financial Officer, TCS stated that from their side, the reduction of the prices was not needed. Telling Reuters, he said that no competitors of TCS are behaving irrationally. TCS claimed that the decline of billing rates came from amendments of the mix of services being sold. The weak forecasts of Infosys, however, prompted price target cuts and ratings downgrades.
Barclays stated that the aggressive pricing and willingness to sacrifice profit margins of Infosys could lead to two things. One a market share gain for Infosys or significant pressure on the sector margins. Deutsche Bank added that the performance of Infosys’June Q emphasizes the belief of pricing coming under pressure.