Price war for big deals to hit IT cos’ margins

Bengaluru Margins of Indian IT services firms are likely to stay under pressure as pricing war has emerged in the technology landscape.

According to industry experts and analysts, price cut by large players to win deals and ChatGPT-induced automation have started to exert pressure on operating margins that are already under pressure owing to high wage cost and low utilisation levels.

“When any new technology comes in, that leads to price renegotiation. For instance, an IT firm can come up with a solution based on new technology like ChatGPT at less price than competitors. Such instances lead to margin pressure,” said Pareekh Jain, an IT outsourcing advisor and founder of Pareekh Consulting.

Brokerage firms have already guided for a price decline in projects in the medium-term owing to integration of ChatGPT kind of solutions.

“Medium-term impact of generative AI is expected to be deflationary on pricing for IT services industry. Programming, testing and contact centre BPO will get impacted over long term. With use of generative AI, project cycles are likely to get shorter and velocity of projects may increase,” ICICI Securities wrote in a note after its discussions with the management of mid-tier firm, Coforge.

Apart from generative AI, aggressive price war is likely to hurt the operating margins of domestic IT firms.

“Large peers are competing with price discounting for growth, which may have negative impact on margins across the industry,” ICICI Securities added.

Similar sentiment has been echoed by industry officials in recent months. HCL Tech’s CEO C Vijayakumar said in an analyst meet that while clients were getting more aggressive on pricing, there was heightened competition for large and mega deals, which constrain margin expansion efforts.

Owing to the slowdown, many numbers of cost takeout deals are coming to the market as enterprises look way to reduce their technology costs. Most large and mid-tier IT firms are competing aggressively to win those deals in order to boost revenue growth in a subdued demand environment.

Such competition is leading to aggressive price war between players, giving less scope for margin expansion in coming quarters. This is despite the fact that deal pipeline of most firms remain robust by the end of March quarter of 2023.

In the fourth quarter earnings, all large IT firms and several mid-tier firms have reportedstrong TCV (total contract value) numbers. TCS reported strong deal pipeline with fourthquarter TCV(total contract value) coming at $10 billion, which included one mega deal wortharound $750 million with UK-based insurer Phoenix Group. For FY23, the company reporteda TCV of $34.1 billion. Infosys bagged large deals worth $2.1 billion in Q4, while for FY23, the total deal wins were at $9.8 billion. Wipro won $4.1 billion worth outsourcing contracts, had a large deal TCV (total contract value) of $1.1 billion during the quarter ended March 2023.

ChatGPT Eating Into Margins

• Brokerage firms already guided for a price decline in projects
• It’s mainly owing to integration of ChatGPT type of solutions
• Medium-term impact of generative AI is deflationary
• AI-led project cycles are likely to get shorter
• And velocity of projects may increase

" When any new technology comes in, that leads to price renegotiation. For instance, an IT firm can come up with a solution based on new technology like ChatGPT at less price than competitors. Such instances lead to margin pressure"

- Pareekh Jain, founder, Pareekh Consulting