Price hikes still elusive for IT firms

Domestic information technology (IT) firms are grappling with several margin pressures — wage inflation, subdued demand, rupee appreciation and others — but they are finding it difficult to negotiate a price increase with customers to offset their impact.

Optimism among tech vendors and improved guidance notwithstanding, Subhash Dhar, senior vice-president and head of the communications service providers (CSP) business unit at Infosys Technologies Ltd, says his company is having a tough time convincing customers to pay higher prices.

“We’re trying (to hike prices) but it’s not working. The world economy is not like India’s. They (some Western economies) may have come out of the trough and there is no growth,” he said.

Dhar said uncertainty continued to plague the global economy. “We are not really in a high-demand market yet.”

The Infy executive expects prices to remain stagnant for some time. “We don’t expect prices to go up, but we don’t expect them to go down either,” he told DNA.

S Janakiraman, president and group CEO-product engineering services,  MindTree, believes it will take another 6-9 months for billing rates to return to the pre-crisis — 2006-2007 — levels.

“Price increases will not happen within a day. What will happen is prices of newer orders will move up first and then slowly we will see existing customers revising their rates.”

But these price alterations would happen to factor in the impact of lower demand and a strong rupee rather than to offset the cost effect of wage inflation. “It is these factors (demand and supply situation and currency parity to dollar) that will drive price increases,”  Janakiraman said.

According to him, companies would tackle the margin hit from rise in wage cost by improving productivity.

“Since we are doing more fixed-price projects (FPP) now than before, higher productivity has a direct impact on our gross margin. So, impact of wage inflation on margins can easily be managed by improvement in productivity,” he said.

Pankaj Narayan Pandit, associate vice-president and head of airline vertical, Sonata Software, feels that higher volume, which is an outcome of robust demand, would eventually push up billing rates.

Pandit expects a lot of pent-up capital expenditure (capex) that was held back last year to be released this year.

“Most companies in the West set aside opex and capex spends for IT, just like they do for R&D. Last year, they utilised the opex budget, but capex was left untouched. When this (capex) is released, demand for IT services will go up and that could push up prices,” he said.

As per Gartner data, financial services companies in North America spend the most on IT with an allocation of close to 8% of their total revenue, while airlines spend the least at 1.95%. Communication firms set aside 6%, construction 5%, healthcare 4% and retail 2.5%.

Pandit predicts billing rates to go up 10-15% as tech vendors try to haggle with their customers to dilute margin impacts from market forces.

Despite the hike, he does not expect local companies to lose their competitive edge. “They (local firms) would still be more competitively priced than their MNC peers. Today, Indian engineers are billed at the same rate as the McDonald’s boys in the US. So, a 10-15% price increase will not take away their competitiveness.”

HSBC analysts Yogesh Aggarwal and Atul Agrawal in their report on Tuesday say it would be higher prices that would best take care of margin blows. “Pricing improvement could be the most influential margin cushion for the Indian IT industry, as a 1% improvement in pricing flows through as a 70 basis points improvement in margins,” they said in the note.

However, experts feel if at all any upswing in pricing occurs, it will not happen any time soon.

Chandramouli C S, director-advisory services, Zinnov Management Consulting, says rate revision by IT customers will not happen before 12-18 months.

Till then, he says, cost pressures would be taken care by increasing the scale of operations. “Existing clients will increase scale to optimise infrastructure and management costs, which will safeguard margins of the IT companies,” he said.