News & Analysis

Robust US Dollar to Hit IT Services Pricing 

IT services companies in India had waxed eloquent about inflation in the US and Europe helping the offshoring trend, but not anymore

The continued appreciation of the US dollar against currencies across the world and for a good chunk of time could potentially shave off some of the gains that Indian IT service providers had reported over the past two or three quarters. Recent analysis indicates that TCS, Wipro, and Infosys could face some pressures on its services pricing going forward. 

These companies had reported better deals from their customers in Europe and North America as inflationary pressures resulted in enterprises reducing local spends and relying on cost arbitrage through such outsourcing deals. 

As on date, the Rupee has lost about 10% against the Dollar since January this year. This could act as a deterrent in getting better pricing for these IT majors given that enterprises expect cheaper rates on the supply side as well as smaller deals being struck in the short term. Also, companies are consolidating such deals that could mean one’s loss becoming another’s gain.  

Over the second quarter of the current fiscal year, dollar revenues for IT companies remained weak due to the cross-currency headwinds of between 100 to 280 basis points on a quarter to quarter basis. According to ICICI Direct, the decline in the European currency against the dollar is what set this up. This, they said, could continue for another two quarters. 

Market analysts are of the view that the pricing benefits that IT service providers were reaping for close to four quarters which could now become a challenge due to the slowing down of demand amidst the macroeconomic headwinds. The rupee depreciation, which was expected to work in the favor of IT majors, could play out differently as clients are now expecting discounts. 

Here is what Rajesh Gopinathan, TCS CEO said after the second quarter results: “Many of our large customers will find different engagements executed using different contract methods. There hasn’t been a meaningful shift in pricing. As contracts are coming up for renewal, we are typically able to enforce a COLA requirement because inflation is a well-accepted phenomenon.”

By the way, COLA is the cost-of-living adjustment metric which represents an increase in income or salary or allowances proportional to the prevailing rates of inflation. Analysts also expect pushbacks on pricing from clients as they get closer to the next financial year when the macroeconomic conditions could turn more challenging. 

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