Bangalore: India’s top software services outsourcers are set to report a small drop in quarter-on-quarter profit as clients squeeze orders and prices in a downturn and the industry’s growth is set to slow even further.
The country’s $60 billion sector, which provide an array of services from software coding to managing computer networks and call centres, face headwinds such as weak demand, cut-rate prices and rising competition from global rivals such as IBM.
US and European corporate technology chiefs expect to cut IT spending by an average of 5.1% this year, according to a UBS survey released last week.
“Demand environment remains very challenging with no signs of recovery yet,” Surendra Goyal and Vishal Agarwal of Citigroup wrote in a report last week. “Longer term, we wait for stability in business before becoming more positive on the sector.”
The outsourcing sector has also been dented by a large accounting fraud at Satyam Computer Services.
Mid-sized Indian outsourcer Tech Mahindra won an auction on Monday to take a controlling stake in Satyam.
After the acquisition, Tech Mahindra will become the country’s fourth-largest IT services exporter, and could be in a stronger position to compete for large deals with leader Tata Consultancy Services, second-ranked Infosys Technologies and third-ranked Wipro.
Infosys, seen as a trend-setter, kicks off the sector’s results on Wednesday, followed by Tata Consultancy and Wipro.
Infosys is likely to forecast a 4% decline to flat growth in dollar revenue for the fiscal year 2009/10, brokerage JM Financial said.
Investors will focus on software firms’ forecast for the year that began on 1 April, and comments on project cancellations or postponements and changes to their headcount.
An army of low-cost English-speaking engineers has driven an outsourcing boom in India, but turmoil in global markets and a recession in the United States, which accounts for more than half the sector’s revenue, have halted the scorching pace of growth.
Analysts said Satyam’s sale, just three months after the firm sent shockwaves in the sector with a $1 billion-plus accounting fraud, will help restore confidence of clients and investors.
Last month, Infosys chief financial officer V. Balakrishnan told Reuters the company was seeing a slowdown in new outsourcing contracts but has had no large-scale cancellations.
A weaker rupee, which fell nearly 4% versus the dollar in Jan-March quarter after dropping 19% in 2008, would have given some buffer to profit margins of software exporters.
But analysts do not expect the rupee to prop up companies’ margins further.
“Going forward, we remain cautious on the margin prospects of the Indian IT companies on account of the poor global business climate and do not expect any meaningful improvement,” said Harit Shah, a sector analyst with Angel Broking.
Shares in Infosys, valued in the market at more than $16 billion, rose 19% in Jan-March and Tata Consultancy gained 13%, outperforming a 2.6% advance in the sector index and 0.6% in the main index.