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Infy bends on price = margins reset

Friday, 21 December 2012 - 3:59am IST | Place: Mumbai | Agency: dna

The company has taken multiple initiatives in sales and marketing to drive change in behaviour.

For all these years, Infosys Technologies was immutable about one strategy: it’ll not cut price, even as others of equal or lesser halo stayed pragmatic to win business.

That cussedness is said to have crimped volume growth oftentimes.

Now, the higher echelons seem to have veered towards the need for practicality.
Basab Pradhan, the head of sales, client services, alliances and marketing at Infosys, confirmed to Viju K George and Amit Sharma, analysts with JP Morgan, that indeed, Infy has become relatively flexible on pricing in a chase for volume growth.

This is a is a step in the right direction, particularly considering the difficult market environment and Infy’s declining market share (particularly in multi-vendor situations), George and Sharma wrote in a note.

However, they said, the company needs to communicate this tactical shift in focus from ‘high-value’ strategy to volume growth, to help investors realistically calibrate pricing and margin expectations, they said. “A margin reset is necessary.”

The company has taken multiple initiatives in sales and marketing to drive change in behaviour. On the account hunting side, it motivates employees to focus more on Global-2000 accounts with potential of meaningful revenue contribution over a period of time.

Infy has also changed the commission/incentive structure to drive this change in behaviour. It has  implemented a star account program, where senior client partners focus on one key account and not multiple accounts. It is primarily to ensure that senior capable people ensure customer satisfaction and proactive demand generation in these important accounts. We acknowledge these are right initiatives, but they are unlikely to drive competitive advantage, George and Sharma wrote.

On the demand side, Infy maintains uncertainty negligible visibility into clients calendar 2013 budgets. Also, the budgets are not as sacrosanct as earlier and can change significantly over the course of the year, Pradhan seems to have said.

An analyst, requesting anonymity, said Infy may introduce price cuts on certain projects within a vertical, while increasing project pricing in another vertical so as to maintain overall stability.

“Thus, while Infy is getting more flexible in pricing, on a portfolio level, it is trying to maintain realisation. Other initiatives they are doing to improve revenues are increasing focus on the products, platforms and services vertical - which contributes to non-linear revenues, and in the near term, management is looking at improving utilisation and increasing offshoring,” this analyst said.
Rajni Ghildiyal, analyst, Asit C Mehta Investment Interrmediates Ltd, said Infy is usually the last player to cut prices, and has only done so in the last two quarters.

“Players like TCS and HCL Technologies have already gone in for incremental price cuts for quite a while to improve volumes. Thus, Infy’s price cut was long overdue, and while the company will gain on the volumes side due to the slashing of prices, it is taking a long time to catch up its lost market share,” she said.

Going forward, while pricing pressure is likely to continue for the next two quarters, there will be no increase in price by any of the top 4 players, at least for the next three quarters, Ghildiyal believes.

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