India's top outsourcing firms report quarterly earnings growth and emphasize shift to emerging markets

January 18, 2008

4 Min Read
Indian Outsourcers Report Earnings Growth

India's top outsourcing firms have reported quarterly earnings in the last week that reflect potential concerns over the U.S. economy, the rising value of the Indian Rupee, and the growing importance of emerging markets in both providing outsourcing services to the rest of the world and creating new business for outsourcers as their own economies grow.

Outsourcing encompasses a range of services, such as research and development, IT services, business process outsourcing (BPO), and consulting to a range of industry verticals including telecom. (See Who Does What: Outsourcing to India.)

Wipro Ltd. , the country's third largest outsourcer, reported revenues Friday for its fiscal third quarter of 52.36 billion Indian Rupees (US$1.33 billion) in U.S. GAAP terms, an increase of 32 percent over the third quarter of last year. Net income grew by 11 percent over last year to INR8.26 billion ($210 million).

Analysts polled by Reuters Research had forecast a net profit of INR8.65 billion ($220.04 million) on revenues of INR52.78 billion ($1.34 billion).

Suresh Senapaty, Wipro's CFO, noted in a statement that "improved realizations and rationalization... helped us fully mitigate the pressure on profitability on account of foreign exchange impact." The Indian rupee has appreciated 12 percent in value during the last year.

Wipro's IT Services segment provides research and development services for hardware and software design to technology and telecom companies, and software application development services to corporate enterprises. Its BPO segment serves large global corporations.

The company, which counts Cisco Systems Inc. (Nasdaq: CSCO) and Nortel Networks Ltd. among its key clients, noted that its India, Middle East, and Asia Pacific IT services business won a large total outsourcing deal in the telecom sector, which it says "is representative of the increasing size of deals in the Indian market."

HCL Technologies Ltd. reported its fiscal second quarter results on Thursday, recording a 39.2 percent year-over-year rise in revenues to $461 million and a 30.6 percent growth in net income to $84.5 million.

Analysts polled by Thomson Financial had forecast net income of $79.35 million on revenues of $460.61 million.

HCL provides outsourcing services to companies across the financial services, retail, life sciences, high-tech, telecom, and media industries. Among its service offerings, the highest growth during the quarter came from infrastructure services, engineering and R&D services, and custom application services.

Continuing a trend of the last two quarters, HCL saw its fastest growth in the life sciences, financial services, and telecom verticals. Its business from the telecom sector grew 39 percent from the previous year and accounted for 16.1 percent of its revenues during the quarter.

On Wednesday, Tata Consultancy Services Ltd. (TCS) reported revenues of $1.5 billion for its fiscal third quarter, a jump of 37 percent over the same quarter of the previous financial year. Net income was up 35 percent over the previous year to $338 million.

"The fact that in dollar terms TCS has grown at a faster rate than rival Infosys this quarter is quite an achievement," writes Ovum Ltd. 's Samad Masood in an analyst note. "TCS is benefiting from the fact that it built early footholds in emerging markets such as Continental Europe, Latin America, and Asia-Pacific. Continental Europe is starting to bite when it comes to offshore services, and TCS is one of the most established Indian players here now."

TCS announced yesterday that it will consolidate its operations in Eastern Europe, the Middle East, Africa, and Latin America into a strategic business unit to take advantage of growth in emerging market economies. (See TCS Forms Emerging Mkts Unit.)

The company notes that emerging markets today account for around 25 percent of the $730 billion global IT services market, and they're growing at an annual rate of 8 percent compared to the 6 percent rate of developed markets.

"Our plan for emerging economies include [sic] three immediate strategic priorities -- upgrading our presence significantly in the BRIC economies, entering new markets, and expanding our network of global delivery centers," said Gabriel Rozman, executive vice president of the new unit, in a statement.

India's second largest outsourcer, Infosys Technologies Ltd. (Nasdaq: INFY), reported its results last Friday, with third-quarter revenues of $1.08 billion, up 32 percent year on year from $821 million. Net income climbed from $218 million to $310 million.

The telecom sector is among its top three industry verticals -- the others being banking and capital markets -- which grew faster than the company average.

On the company's third-quarter earnings call, CEO S. Gopalakrishnan said Infosys is shifting its emphasis away from North America to markets like India, China, Latin America, and the Middle East. It's also targeting Australia and Japan.

That shift could become increasingly important in coming quarters, in light of economic concerns in the U.S. According to Ovum's Masood, "going forward, concerns about the effect of an economic downturn in the U.S., and a related slowdown in the U.K., are probably unfounded as offshore companies should stand to benefit from tighter cost controls amongst clients."

Should growth slow in those countries, companies like TCS with a strong global position, are "building a balanced business that can better cope with such strains," Masood further notes.

— Nicole Willing, Reporter, Light Reading

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