India’s IT Outsourcing Industry Faces Strain Of Global Economic Downturn

With Infosys Technologies Ltd, a major Indian software services firm, reporting this month a disappointing guidance for the future sales subsequent to the uncertainties in the global economy, industry experts are worried that India’s IT outsourcing industry is under stress of the weakening economic conditions around the world.

Infosys noted that the year ahead looked challenging for the IT services industry with a slow recovery in the global markets. “Global economic uncertainties continue to face the industry,” Infosys CEO and Managing Director S D Shibulal said.

Indian software services firm Infosys Technologies Ltd reported this month that in the July-September quarter there was a 24 percent growth in profit compared to same period last year. The company reported a net profit $431 million in the July-September quarter, up from $346 million in the same period last year.

However, market participants were disappointed with the announcement as the company reduced its earnings per share guidance for 2012 to $2.97, down from $3.03 it had projected earlier. “The guidance is certainly not in line with expectation,” Jacob Koshy, a portfolio management specialist based in Mumbai, said.

Last month, Infosys acquired Swiss technology consulting firm Lodestone Holding AG for 330 million Swiss francs ($350 million) with an objective to help the company to improve services to its clients. “Lodestone acquisition was expected to present a higher guidance. But we are disappointed,” Ashok Mehta, a financial analyst based in Mumbai, said.

Meanwhile, Tata Consultancy Services, India's biggest software services exporter, reported 49 percent rise in profit for the second quarter ending September 2012 compared to same period last year. Though the company does not present forecast, it is expected to surpass the revenue growth projected by the National Association of Software and Service Companies (NASSCOM).

"We've said that we'll be ahead of NASSCOM, we'll be delivering on that and we're on course," Natarajan Chandrasekaran, CEO and Managing Director of TCS, said. But the disappointing fact is that that the earnings before interest and tax margins rose only 26.8 percent in the July-September quarter, down from 27.5 per cent the previous quarter.

The continuing debt crisis in Europe and the tentative U.S. recovery have hurt the outsourcing sector in India. While overall demand for IT services will continue to grow as productivity efficiencies from IT are now a well-accepted reality, the acceleration will not be so high due to the weak global economic condition.

The outsourcing sector in India is faced with several challenges, including severe global competition, acute challenges in sourcing talent and increased expectation by customers for innovation in technology and business processes.

Adding to these challenges are the stringent criteria to be in the basket of consideration by the clients, increasing labor protectionism and increasing number of innovative mobile and tablet apps that reduce the relevance of the traditional software systems.

In a downturn, IT outsourcing projects could get impacted due to business declines and freeze in decision-making from economic uncertainty. From a macro perspective, the situation with the U.S. and the various economies in Europe could certainly affect volumes of outsourcing to India.

The slowdown can be largely due to business declines faced by clients rather than a freeze in decision-making due to uncertainty in the economic outlook of some nations. Some clients might postpone decisions, waiting for clarity in their environment. The situation in the U.S., which is the largest contributor to the volume of IT business, will be the more critical factor compared to the economic slowdown in Europe.

Meanwhile, experts will be keenly watching Wipro Limited, which will report its quarterly earnings Nov. 2, to find further indication on the revenue growth in India’s IT outsourcing industry.