More trouble brews for Indian tech companies

Though there have been no cancellations of contracts by invoking the force majeure clause, a number of clients - especially in the worst-affected sectors like travel and hospitality, oil and gas, as well as manufacturing - have started asking for reducing level of IT support.

Enterprises in the United States, the United Kingdom, and Europe, which have halted operations or have significantly reduced their scale owing to Covid-19, are pressurising Indian IT services vendors to reduce their level of support and maintenance functions.

People in the know said this could be seen as a precursor to renegotiation of pricing, which clients may take up with IT firms in coming quarters.

“Though there have been no cancellations of contracts by invoking the force majeure clause, a number of clients - especially in the worst-affected sectors like travel and hospitality, oil and gas, as well as manufacturing - have started asking for reducing level of IT support,” said an official of a mid-tier IT services firm.

This potentially opens up the window for renegotiation of prices, said the person.

Core business operations, comprising application and maintenance-related work, still contribute around 60 per cent to Indian IT firms’ top line, despite a rising share of digital revenue.

In case of reduced IT support, the share of core revenue is likely to fall.

Further, as billing in many projects is done on the basis of the number of engineers deployed in a project (with hourly rates), any reduction in support staff could lead to downward revision of pricing in coming days.

According to experts tracking the sector, clients in hospitality, manufacturing, and oil & gas are likely to hold back their IT spends, which could potentially affect 10-12 per cent of export revenue, aggregating $15 billion.

With a travel ban imposed by many nations, several airlines have informed their investors regarding the cut in their budgets.

While US-based Delta Air Lines has gone public about reducing its expenditure, peers such as United Airlines, American Airlines, JetBlue, and Southwest Airlines have hinted at the same.

Hong Kong’s Cathay Pacific has said it will incur losses in the first half of 2020, owing to the outbreak.

Besides airlines and cruise companies, even oil and gas majors including Total SA, BP, Exxon Mobil, Royal Dutch Shell, and Chevron Corporation are likely to cut IT spends in 2020, owing to the plunge in crude oil prices.

“Many of the new multi-year contracts were signed in January and February.

"In that way, the deal pipeline is good. But given the crisis, ramping up of these deals will take time,” said an IT outsourcing advisor.

Brokerage firm Anand Rathi said in a report that dollar revenues of Indian IT firms are likely to fall three percentage points in FY21.

In a note, it said the overall industry will grow around 4 per cent in the current financial year.

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