Low demand has forced many Indian IT services companies to offer price discounts of 10-15% as this seems the only way out to retain existing market share.
The $100-billion Indian IT industry, of which around $70 billion constitutes exports, has witnessed an escalation in pricing pressures and even top-tier firms are now facing the heat.
?Competition has flared up dramatically as some top-tier IT companies are picking contracts at fairly low price points, which was not the case six months ago,? said Sudin Apte, CEO, Offshore Insights. ?Everyone is now getting dragged into it.?
It seems like an almost ?no-win? situation. Even India?s second largest IT services exporter, Infosys, which always commanded premium pricing at the market place appears to be getting attuned to the current situation. CLSA, in its recent report on Infosys, said: ?Relative loss of revenue market share and a continued soft demand environment is forcing Infosys to alter its go-to market strategy and be more aggressive on pricing and flexible on contract terms.?
Market estimates indicate that there has been a 10-15% reduction in pricing over the last few months with sectors such as finance and telecom leading the cuts. Infosys chief financial officer V Balakrishnan told FE that it would be wrong to say that there is pressure on every deal, ?We are not seeing any across-the-board pricing pressure though there can be one or two cases that are either customer- or sector-specific.?
Dipen Shah, head of Fundamental Research, Kotak Securities, said: ?One notable feature is the reduction in average realisations for most large companies. Companies have attributed a large part of this to one-off re-negotiations; it will be a closely watched matrix in 2Q.?
The competition in the IT outsourcing contracts market has further intensified as the large deals are being broken into smaller parts giving an opportunity for more players to participate in the bidding process. This has resulted in increased pricing pressure on the Indian IT companies.
Pradeep Mukherji, president, Avasant Asia, an outsourcing advisory, said that tier-2 Indian companies which generally price themselves 15-20% lower than the tier-1 companies are further cutting down their prices putting pressure on larger firms to follow suit. However, there are few verticals like healthcare, retail, energy & utilities from whom the Indian IT services can command a pricing premium for their services, but there are very few firms which can provide such specialised skills.
The scenario is a certain worry for the industry ahead of the second quarter results announcement in October, though the only consolation is the current depreciated level of the rupee against US dollar which would offset the pricing pressure on their export revenues.