Going will be tough for IT firms relying mainly on cost advantage

Indian IT companies that work mainly on cost advantage are likely to come under severe strain in the next three-four quarters on pricing and deferral of payment as their clients navigate the Covid-19 pandemic. Some clients may even seek heavy discounts — as high as 50 per cent — say analysts, though companies don’t talk in open about this.

Companies feel the impact of the current crisis is on par or even worse than the 2008 Global Financial Crisis (GFC).

Deferring spending

“We already see instances of budget reductions, cuts in discretionary spend, requests for temporary discounts, pricing pressure, and restructuring of existing spends,” Abid Neemuchwala, CEO, Wipro, told analysts while discussing the company’s March quarter and full fiscal financial results. Sectors like retail, hospitality, airlines, energy, especially oil & gas, and the auto segment in the manufacturing business are experiencing a more immediate and deeper impact, he added.

A lot of requests are for near-term postponement or deferment of discretionary spend, he said.

Pricing depends on the industry of the clients, their segments, and there will be different levels of cost stress among them. At this stage, there is no quantified view on that but some of those discussions will come up, Infosys CEO Salil Parekh, told analysts. Usually those discussions are also coupled with different delivery models, consequent consolidation discussions that come about, he added.

Payment term extensions

Abhishek Singh, Vice-President at research firm Everest Group, said that payment term extensions are deployed more pervasively than discounts. Especially so in distressed industries such as travel, transportation, hospitality, and medical devices. “We have seen payment terms going up to 180 days in a few situations,” he said.

Singh said it is true that discount requests are extending up to 50 per cent. However, it is happening largely related to time and material (T&M) projects and not so much in relation to fixed price and managed service engagements that form a larger share of revenue profile for large IT vendors. Smaller IT and staffing vendors (for whom T&M is a larger share of their revenue profile) are going to be impacted more compared to large IT vendors, he added.

Pricing agility

Boz Hristov. Professional Services Senior Analyst, Technology Business Research, Inc, said vendors may have to demonstrate pricing agility to retain clients. If the incumbent is not offering/thinking of ‘sweetening up the deal’, there is likely a competitor knocking on the door ready to do so.

It is going to be a challenging three or four quarters after which the company can get back to the same levels of stability, Rajesh Gopinathan, CEO, Tata Consultancy Service, told analysts.

As of now, TCS does not foresee any major threat to the eventual collection of receivables. However, in the near term, the company expects some customers to request extension of payment terms, said a report by Motilal Oswal Research.

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