The much vaunted Indian software developers are reeling under the triple impact of a slow down in the US & Europe, inability to land in even a 1 per cent hike in price of re-negotiated contracts, and having sold their future revenues at $ 1 to Rs 41, will now make nothing out of a fall in the value of the Rupee. Consequently this sector will face both topline and bottomline pressure in FY09, and stocks will either remain subdued or fall.
In a recent investor meet Infosys, confirmed price pressures in "select" capital market accounts, but also added that it does not consider this a trend yet. Infosys also re-affirmed its avowed intent to defend its preferred price points even at the risk of losing the business. Similar voices have emanated from Cognizant and TCS post their June quarter results.
This on-going chatter around pricing is at variance to the stable pricing thesis for the next two years, that prevailed so far with the Tech analyst community. Pricing remains delicately poised pending an acceleration of demand, and recent trends, especially in financial services, are setting up a worrying precedent. Earlier forecasts were predicated upon stable pricing in the March08 quarter. This should have arithmetically translated into a 1.0-1.5% YoY increase in average rates for FY09.
Most industry folks now claim that pricing will deteriorate slightly in FY09 over last year, but this trend is not worrying yet. Even though the industry has maintained a pricing discipline in the last 18 months, to sustain pricing the demand needs to pick up soon. The trend however is worth watching.
In 3/4ths of the cases, pricing has been negotiated for less than 40% of the repeat business. This indicates that it remains tough to win pricing hikes, and often contract terms and durations come in the way. However, clients can push through pricing discounts with greater irregularities. Why does pricing matter, we can ask? Each 1% change in pricing is twice as sensitive to margins as currency. 1% pricing implies 70bps, but 1% currency move implies 35bps.
In conclusion further delays in volume uptick will risk not just topline but also pricing assumptions in models making the entire sector a SELL.
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Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
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