Indicating an impending slowdown for the IT industry, Infosys chief operating officer U B Pravin Rao on Wednesday said that clients are demanding 20-30% savings on contracts. Though the company later issued a statement clarifying that this does not necessarily mean that vendor pricing is getting impacted and that “there are enough levers available to meet the client demand on cost take-outs without necessarily impacting the pricing.” Infosys’ ADRs on the New York Stock Exchange fell over 2.20% after opening. On the Bombay Stock Exchange, the company’s shares closed 1.83% down at Rs 961.50.
Analysts see that such demand for savings would put pressure on revenues as tech spending would be lower and clients would be slow in reinvesting in newer technologies. However, Infosys maintained that it has enough levers to maintain its margins and has been able to maintain stability in pricing. The pressure on pricing is largely on segments like software testing, application, development & maintenance (ADM) and infrastructure projects, which are spread over a period of three to five years. However, the COO said that this has not resulted in any change in its rate card yet.
You may also like to watch:
At the Morgan Stanley investor call on Wednesday, Rao said, “There is no cut on our rate card. In fact, the pricing is stable.” He also said the company will maintain its revenue growth guidance of 6.5-8.5% in US dollars in constant currency terms for FY18.
A company statement later clarified to reports of a price cut, “Infosys would like to clarify that the news reports on pricing cuts seen by the IT industry being attributed to the Infosys COO are incorrect. His comments have been misrepresented. The comments made in the interview refer to cost take out efforts by clients towards reducing their programme investments in the ‘run’ side of business, to reinvest them in newer technologies or the ‘change’ side of business. Cost take outs by clients do not necessarily translate into an impact on vendor pricing. There are enough levers available to meet the client demand on cost take-outs without necessarily impacting the pricing. Infosys commentary on pricing is no different from what we have shared with the market earlier. We would like to reiterate that we are not seeing anything new on pricing. This has also been clarified in the webcast of the Morgan Stanley India Summit.”
In the current subdued environment for the Indian IT services industry, certain segments like application development & maintenance, infrastructure services, testing which is considered as the “run side” of the business has come under pricing pressure.
The Infosys COO said this pressure has largely been due to the commoditisation of this space over the last couple years but they have been able to hold onto their operating profit margins.
Infosys ended FY17 with an operating profit margin at 24.7% as compared to 25% at the end of FY16. In the short to medium term, it expects the margin to be in the range of 23-25%.
The Infosys COO said that there has been certain slowdown in the customer decision making cycles, with many of them being uncertain about their technology spend. This has resulted in certain challenges for the company as there is no clarity on the spend on technology services by sectors such as financial services and retail.
On the impact of recent changes in the US visa policy, the Infosys COO said there has been no noticeable change for the company but admitted there has been some impact from the suspension of premium processing of H-1B visas. But he did not elaborate on the extent of the impact.
Infosys has already announced that it would hire around 10,000 people in the US in the next two years by setting up four development centres. As part of this process, it would also be hiring both experienced professionals and freshers in the US market. “We are trying to increase our local presence in all the markets we are operating,” Rao said.
On the impact of automation, he said it was still early to measure the benefits. “Any impact is likely to be felt only in the next two to three years,” he said.