Infosys CEO Vishal Sikka finally has good news for IT industry

Infosys’ chief executive officer Vishal Sikka’s recent commentary on stable pricing for the first time since the second quarter of financial year 2014-15 is an indicator of pricing stability in the sector, which is a positive development, said brokerage UBS in a note.

The brokerage said that pick-up in IT budgets in banking, financial services and insurance companies, mainly in the US, which are the major clients of Indian IT vendors, should lead to improved revenue growth in 2017.

“An easing pricing environment implies better demand conditions, in which competitive intensity eases as volumes pick up,” said UBS.

Pricing pressures in traditional IT services business has been one of the key concerns weighing down the sector besides automation, visa issues and the rupee’s appreciation.Due to these concerns, the BSE Information Technology Index has underperformed the benchmark this year as well in 2016. So far this year, the BSE IT index is down 5.5% while the Sensex has gained 12.4%.

UBS said price aggression by tierI IT vendors lasts four to eight quarters, post which the incremental share gains fall and competition catches up.

“Price aggression typically tends to ease as vendors start to focus on margin protection, offering relief to the entire sector’s profitability metrics in the face of increasing costs and currency pressures. This could help offset higher onsite hiring costs due to increasing protectionism in various markets,” noted UBS.

UBS sees a ‘modest revenue recovery’ for Infosys led by the US banking sector and expects Tata Consultancy Services and Cognizant to see a meaningful recovery given their higher exposure to US banking clients which saw slower IT spends in 2016.

Among the top IT firms, UBS has a ‘buy’ only on TCS, while it has a ‘sell’ or ‘neutral’ on others. “Its lowered expectations relative to those for Cognizant and Infosys offer upside potential,” said UBS, which has a target price of Rs 2,800 on TCS.

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