x
OSS

Indian Outsourcers Proceed With Caution

India's four largest outsourcers, Tata Consultancy Services Ltd. , Infosys Technologies Ltd. (Nasdaq: INFY), Wipro Ltd. (NYSE: WIT), and Satyam Computer Services Ltd. (NYSE: SAY), have reported strong growth in revenues for the fiscal first quarter, but all expressed caution over the economic outlook -- particularly in the U.S., where they derive the bulk of their business.

That caution is provoking strategy shifts that "will ultimately make the Indian companies a bigger threat to the Western IT services firms," writes Ovum Ltd. analyst Georgina O'Toole in a recent note.

The cautious outlook appears justified. A survey released last week by India's National Association of Software & Service Companies (Nasscom) projects outsourcing firms will be affected more heavily by the U.S. slowdown in 2009, as the U.S. accounts for more than 60 percent of Indian software and services revenues. Nasscom projects that revenues will grow by between 21 percent and 24 percent for the financial year ending March 2009, compared with a growth of 29 percent for the 2007-2008 financial year.

Outsourcers are looking to diversify their businesses away from U.S. markets, particularly to Europe, which O'Toole says accounts for 30 percent of Indian IT exports. By "investing in the productization of their services," companies "are looking to develop repeatable services and IP-based assets that can be delivered without increasing the staff base radically."

They are also tightening recruitment and training policies, emphasizing higher value services such as consulting, and increasing their onshore presence by acquiring U.S. companies.

It could all add up to an advantage for the Indian outsourcers.

"In the medium to long term, the paralysis in decision-making within U.S. clients (and indeed, U.K. clients) will begin to ease," O'Toole writes. "When it does, the added pressure felt as a result of the economic slowdown will result in clients taking a fresh look at the possibility of lowering their cost base via increased offshoring. When that time comes, the Indian firms will be better placed than ever to compete for business."

And now... the numbers
Wipro, the country's third-ranked software and services firm, reported first-quarter revenues of 59.62 billion Indian Rupees ($1.39 billion), up 43 percent over the same quarter last year, and slightly above the INR59.1 billion estimated by analysts. (See Wipro Reports Major Growth.)

Growth in net income slowed for the fifth quarter in a row, rising 14 percent to INR8.14 billion ($189.76 million) and coming in below estimates of INR8.85 billion ($206.31 million) from analysts surveyed by Bloomberg and INR9.02 billion ($210.28 million) forecast by a Reuters poll.

In the company's prepared statement, chairman Azim Premji said, "Given the environment, we remain cautious in the near term. Looking ahead, for the quarter ending September 2008, we expect our revenue from our IT Services business to be approximately $1,089 million."

That caution hit Wipro's share price, which closed INR14.25 (3.75%) lower at INR365.55.

"There is no doubt that some of our clients who are in the financial services and retail space have witnessed a significant amount of turmoil, and that has been a reason for caution for us," said Girish Paranjpe, joint CEO of Wipro Technologies, on the company's earnings call. "Business as usual from clients continues fairly uninterrupted. [But] there is clearly caution in kicking off new programs and there is some amount of extension of timelines for negotiating larger duration programs."

At the same time, the company has signed around $500 million worth of deals that will kick in "two or three quarters from now," said Suresh Vaswani, the other joint CEO. "We certainly see a better outlook for the second half of the year based on the pipeline that we have and deals that we won in quarter one."

Wipro, which counts telecom equipment vendors like Cisco Systems Inc. (Nasdaq: CSCO), Nortel Networks Ltd. , and Nokia Networks among its customers, did some house cleaning during the quarter. The company combined its telecom services with the media and entertainment business and combined its IT services and business process outsourcing (BPO) into a separate vertical, so it can offer end-to-end services specifically for telecom companies.

In the telecom space, Wipro is "seeing an equal number of ramp-downs as ramp-ups," although there has been an "uptick" in telecom equipment business, said Sudip Nandy, the company's chief executive for Telecom and Product Engineering Solutions.

Wipro's revenues from the technology, media, and telecom vertical grew 27 percent year-on-year.

Satyam, the fourth largest outsourcing firm, also reported earnings Friday, with a 40.9 percent year-over-year increase in revenues to $637.3 million and a 36 percent growth in net income to $126.6 million, in accordance with U.S. generally accepted accounting principles (GAAP).

"From an operating perspective I don’t think this quarter is different to any other quarter," said one executive on Satyam's earnings call.

Ram Mynampati, president of Satyam's commercial and healthcare businesses, noted on the call that while markets such as financial services and automotive are "volatile and dynamic," the retail, transportation, aerospace and defense, and telecom and media markets are doing well.

Satyam reaffirmed its second quarter guidance, which calls for revenues of between $645.6 million and 651.9 million, a growth of 3.5 percent to 4.5 percent.

The company's stock fell INR31.10 (7.51%) to close at INR382.95 on the Bombay Stock Exchange.

TCS, India's largest outsourcer, reported on Wednesday that its first quarter revenues rose 21 percent year-on-year to $1.5 billion, while net income was 2 percent higher at $296 million. (See TCS Reports Q1.)

"Major markets, North America, U.K., and Europe grew despite a challenging external scenario," said N. Chandrasekaran, chief operating officer and executive director, in a statement.

Infosys, which reported its financials on July 11, saw a 24.5 percent increase in revenues from the previous year, to $1.16 million. Net income also grew, to $306 million from $263 million. (See Infosys Reports Q1.)

For the second quarter, the firm forecasted revenues of $1.215 billion to $1.225 billion, representing a year-on-year growth of 18.9 percent to 19.9 percent.

S. Gopalakrishnan, CEO and managing director, said in a statement: "Although the global economic environment continues to remain uncertain and could impact IT spending in the short term, we see several opportunities for growth as customers relentlessly focus on improving efficiency."

— Nicole Willing, Reporter, Light Reading

Be the first to post a comment regarding this story.
HOME
Sign In
SEARCH
CLOSE
MORE
CLOSE