TCS won’t engage in price war, says Subramaniam
NO DISCOUNTS Rivals cutting rates, but we aren’t worried about pricing play: COO
BENGALURU: Tata Consultancy Services Ltd (TCS) 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 (COO) 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 may 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 December quarter operating margin of 25.6%, about 3 percentage points wider than Infosy’s 22.6%, highlighting how the Mumbai-based 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 income was more than TCS’S $367.2 million.
TCS said that it continues to work towards operating between 26 and 28% profitability band even as Infosys in April last year dropped its profit outlook to be between 22% and 24% in the current financial year.
Many analysts say this was on account of the company looking to drop prices for its services although Infosys maintains that the reason behind lowering of profitability is to plough back the savings to invest in digital technologies and t o also cover expenses related to hiring more locals in the US and to pay more to hire the brightest engineers.
The underlying reason behind 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 which each company 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 that the company’s profitability will remain challenged in the current q u a r t e r a n d wi l l r e main unchanged in the financial year 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.