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Plunge in Oil Prices Putting Pressure on IT Cos Margins

Published: 22nd January 2016 03:02 AM  |   Last Updated: 22nd January 2016 03:02 AM   |  A+A-

CHENNAI: Plunging crude oil prices have an unusual casualty - IT services companies who offer software and hardware solutions to oil producers and marketing firms.

Companies like Wipro, Infosys, TCS, L&T Infotech, have significant exposure to energy and utility segment and falling crude prices seem to be putting pressure on pricing and profit margins.

For instance, the country’s third largest software services firm Wipro, which draws 14.4 per cent of its total revenue as on December, 2015 from this segment, took a 4 per cent hit on its revenue growth.

“It was a bet that was taken strategically for us but right now it’s killing us,” outgoing CEO TK Kurien said in an interview at the World Economic Forum in Davos, Switzerland.

Owing to excess oil supply, prices have been falling non-stop for quite sometime. From a high of $100 a barrel in 2014, crude prices touched $27 - a level last seen in 2003. Estimates peg prices to touch as low as $20 this year.

Silver.JPG“Oil companies are in trouble and their IT spend will fall. Customers, obviously, want more work at less pay. Though long-term contracts are one aspect, the bottomline is, we need to be aware of customer’s pressures to revise pricing,” BVR Mohan Reddy, Executive Chairman, Cyient told Express. Cyient gets about 6 per cent from energy segment, which includes oil companies besides power producers and others.

In a recent note, Cyient said drop in oil prices has created cost pressure on client spend in the energy space and that the company was working in parallel areas like marine to drive growth.

“Industry gets affected due to any extraordinary developments and crude prices have taken a sharp plunge of late impact some of the IT services firms. But I think the worst is behind us and it should stabilise,” said Sarabjit Kaur Nangra, analyst, Angel Broking.

Reduced oil prices are dampening new investments in oil and gas industry and are also inhibiting investments in alternate sources of energy. As a result, companies are staring at a weak client pipeline in both the industries across geographies and business units.

“...on the energy side where there is lot of pressure because of the oil prices, there is definitely pressure and budget cuts but in other cases budgets are typically flat,” Pravin Rao, CFO, Infosys said in an analyst call last week.

Interestingly, just last quarter, the company had completed the acquisition of Noah Consulting, a  consulting services provider for the oil and gas industry.

Similarly, David Rowland, CFO, Accenture too noted last month that revenue performance in the energy industry and in the growth markets was challenged due to industry and country-specific cyclical headwinds. “We are carefully monitoring the situation in Australia and Brazil, which have been affected by commodity price volatility in the energy and natural resources sectors,” he said.

According to IDC Energy Insights’ Worldwide, the global market for IT services to the oil and gas industry will touch $19.1 billion in 2017.

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