IT cos may see rise in margins in next 2 qtrs

Bengaluru: Pricing environment in the IT outsourcing market remains almost stable despite fears of slowdown impacting demand for technology work in coming quarters. Domestic IT firms also said clients are not asking for discounts at the time of contract renewals on the back of inflationary environment globally.

"We are seeing inflation across consumer prices and wages. We are going back to our clients as part of the clauses that we have like COLA (cost of living adjustment). Some time, we are going back as part of digital pricing as part of the value we create under cost takeout programme. So, these are multiple conversations across each client. But the good news is we see a reduction in discounts during renewals," Nilanjan Roy, Chief Financial Officer of Infosys, said during post results news conference.

COLA provisions are very common in IT managed services contracts. This clause protects the service provider from the risk of inflation as clients have to adjust price upwards as per inflation rates.

Last year, many service providers were able to increase prices on contracts owing to sharp rise in wage cost amid high inflation. However, as demand comes back to normal after the Covid-induced surge, pricing power may lose momentum. In a recent note, global consulting firm ISG has highlighted that margins are falling in core services.

"We do see pricing power for the most in-demand skill sets, but margins are falling for more commoditized services," ISG said. "We see service providers responding with more automation, more innovation and other productivity measures," it added.

Pricing is the most important aspect for Indian IT services players given the pressure on operating margins owing to high wage cost. With resumption of travel and work from office, travel and utility costs are also inching up.

Cross currency impact is another factor that is eating into the margin despite rupee hovering at record high level against US dollar. Against this backdrop, IT companies are resorting to various cost optimisation measures apart from hiking the contract pricing to protect margin.

In the quarter ended September, the top four IT firms reported a rise in their operating margins. Market leader TCS saw its margin expanding by 90 basis points over last quarter to 24 per cent in Q2 of FY23. Infosys's margin rose 140 basis points to 21.5 per cent, while it expanded 93 basis points to 18 per cent for HCL Tech.

Wipro also saw its margin rising by 16 basis points to 15.1 per cent during this period. Usually, last quarter of each year is vital to gauge the pricing environment as many deals come for renewals. With near absence of discounts, and fall in attrition numbers, margins of IT firms are likely to improve further in the second half of FY23.