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Indian IT outsource companies face tough conditions

Tata Consultancy Services touts its reliability and skill in guiding clients through unpredictable times with the marketing logo “experience certainty”. But with the fallout from the US subprime crisis sending shockwaves through the Indian information technology outsourcing industry, the country’s biggest computer services company is longing for a little certainty of its own.

In the three months ending in March, Mumbai-based TCS reported its worst quarter since its public listing in 2005, while guidance from rival Infosys Technologies indicates this quarter will be one of the Bangalore-based group’s slowest in eight years.

The conditions, which have been mirrored throughout the sector, have led India’s most important export-revenue generating industry to speed efforts to reduce its dependence on the US market, which accounts for about half or more of revenues.

“The main strategy is to continue to manage the diversification every quarter, to plan where the growth is going to come from and to not depend too much on one customer, one industry and one market,” said N. Chandrasekaran, chief operating officer at TCS.

India’s outsourcing industry, which provides services such as managing IT systems and back-office processes for overseas clients, earned export revenue of more than $40bn in the fiscal year ended March, making it one of the pillars of India’s economy.

After reaching peak growth rates in the past few years of more than 40 per cent, concern over an appreciating rupee and the US credit crunch turned former market champions TCS, Infosys and Wipro into some of the worst performing stocks in India last fiscal year.

But it was not the latest quarter that the full extent of the slowdown became apparent. TCS on Monday reported a quarter-on-quarter contraction in net profit of 6.17 per cent, while Infosys last week reported its slowest quarterly profit growth in eight years of 9.2 per cent year-on-year, according to Bloomberg.

Infosys provided better-than-expected guidance of 21 per cent sales growth this fiscal year, forecasting that once clients got over the initial shock of the slowdown, they would begin increasing outsourcing to cut costs.

Suveer Chainani, analyst with Macquarie Securities in Mumbai, added that the present slowdown was so far not as dramatic as during the last US slump in 2002-03 and the bursting of the internet bubble.

But many believe worse could be yet to come once the wobbles spread from clients in the US financial services industry to those in the wider economy.

Mr Chandrasekaran said his company is trying to hedge this risk by gradually reducing its dependence on the US market, from 65 per cent of sales five years ago to 50.7 per cent now.

At Infosys, V. Balak-rishnan, chief financial officer, said the group’s “ideal geography” would involve having 50 per cent of revenues coming from North America, 30 per cent from Europe and the rest from other markets, compared with the present situation of 62 per cent in the US and 29 per cent in Europe.

Achieving that is easier said than done. In Japan, for example, Infosys has some leading clients, such as Toshiba and Nomura, but generates just 1.5 per cent of its revenues from a country that has the world's third biggest IT spend.

Most companies are also trying to increase the amount of work they do for clients in low-cost India rather than on-site in expensive developed market locations.

Источник: Financial Times

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