TCS re­jects price cuts in pur­suit of new clients

NO DIS­COUNTS Ri­vals cut­ting rates, but we aren’t wor­ried about pric­ing play: COO

Hindustan Times (Noida) - - HTBUSINESS - Varun Sood feed­[email protected]

BEN­GALURU:TATA Con­sul­tancy Ser­vices Ltd said it won’t en­gage in a price war al­though some of its ri­vals have of­fered dis­counts to win new busi­ness.

“We are see­ing in the mar­ket some of them are drop­ping prices,” chief op­er­at­ing of­fi­cer N. Gana­p­a­thy Subra­ma­niam said with­out nam­ing the com­pa­nies that are re­sort­ing to dis­counts to boost rev­enue growth. “We are not wor­ried about the pric­ing play of our com­pe­ti­tion be­cause we have al­ways main­tained you can­not com­pro­mise mar­gins to fun­nel growth.”

Ex­am­ples abound in the world of busi­ness of how re­tal­ia­tory price slash­ing re­sults in a pre­cip­i­tous drop in in­dus­try prof­itabil­ity. With TCS’S De­cem­ber quar­ter op­er­at­ing in­come of $1.35 bil­lion al­most dou­ble that of its near­est lo­cal ri­val In­fosys Ltd, the Mum­bai-based com­pany can use other tac­tics in its arse­nal to stave off the de­bil­i­tat­ing ef­fects of a price war.

“Pric­ing alone is not the cri­te­ria. So, when we say we will be ag­gres­sive, what we are say­ing is that you need to have a solution, the sleek­ness of the solution, the abil­ity to cre­ate busi­ness value, and how you are com­mit­ting to growth pa­ram­e­ters (of a client). All of this makes a win­ning propo­si­tion for clients,” clar­i­fied Subra­ma­niam.

Some an­a­lysts had in­ter­preted that TCS might lower its pric­ing in some work it does af­ter the man­age­ment told an­a­lysts in a post-earn­ings in­ter­ac­tion on Thurs­day that the firm plans to par­tic­i­pate ag­gres­sively when it spots a de­mand op­por­tu­nity.

TCS re­ported a De­cem­ber quar­ter op­er­at­ing mar­gin of 25.6%, about three per­cent­age points wider than In­fosys’s 22.6%, high­light­ing how the Mum­baibased TCS is gen­er­at­ing more rev­enue at higher prof­itabil­ity.

Sig­nif­i­cantly, un­til the De­cem­ber quar­ter of 2008, In­fosys earned more for its ser­vices of­fered, as its $373 mil­lion in op­er­at­ing profit was more than TCS’S $367.2 mil­lion.

TCS said it con­tin­ues to work to­wards op­er­at­ing be­tween a 26% and 28% prof­itabil­ity band, even as In­fosys in April last year dropped its profit out­look to be­tween 22% and 24% for the cur­rent fis­cal.

Many an­a­lysts say this was on ac­count of the com­pany look­ing to drop prices for its ser­vices, al­though In­fosys main­tains that the rea­son for the low­er­ing of prof­itabil­ity is to plough back the sav­ings to in­vest in dig­i­tal tech­nolo­gies and also cover ex­penses re­lated to hir­ing more lo­cals in the US and pay more to hire the bright­est en­gi­neers.

The un­der­ly­ing rea­son for de­clin­ing prof­itabil­ity at In­fosys and other large IT firms, in­clud­ing Wipro Ltd and HCL Tech­nolo­gies Ltd, is that there is pric­ing pres­sure on com­modi­tized deals or tra­di­tional IT work, which still ac­count for over three-fourths of to­tal rev­enues.

These firms main­tain they earn more money on work re­lated to dig­i­tal, the fuzzy um­brella term that each firm uses to call rev­enue gen­er­ated from ar­eas gen­er­ally clas­si­fied as so­cial, mo­bile, an­a­lyt­ics, cloud com­put­ing, and In­ter­net of Things.

How­ever, dig­i­tal still brings less than a third of the over­all busi­ness.

Wor­ry­ingly for in­vestors of In­fosys, some an­a­lysts say the com­pany’s prof­itabil­ity will re­main chal­lenged in the cur­rent quar­ter and will be un­changed in the fis­cal be­gin­ning April.

“We project mar­gins to be roughly flat in FY20,” Keith Bach­man, an an­a­lyst with BMO Cap­i­tal Mar­kets, wrote in a note dated 11 Jan­uary.

BLOOMBERG/FILE

Tata Con­sul­tancy Ser­vices chief op­er­at­ing of­fi­cer N Gana­p­a­thy Subra­ma­niam.

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