Bangalore: India’s top software services companies are likely to report a rise in quarterly profits, but worries persist about the near-term outlook for the export-driven sector as technology spending falls and clients seek fee cuts.
Analysts said a reduced pace of deal cancellations and signs of stability in the financial sector, a key customer base, was positive for India’s $60 billion outsourcing sector, but a pick-up in growth was unlikely due to fragile global economy.
“The IT sector is not out of the woods yet. Pressure on the financials will continue for some time as demand outlook is not great,” R.K. Gupta, managing director at Taurus Asset Management, said. “Margins will remain under pressure.”
Infosys Technologies, India’s No. 2 IT services firm which is seen as a trend setter for the sector, will be first to off the blocks with its fiscal first-quarter results on Friday, followed by leader Tata Consultancy Services and third-ranked Wipro.
Investors will be watching management comments on any change in demand, the pricing environment and staff levels, after hopes of growth revival later this fiscal year sent outsourcers’ stocks soaring up to 44% in the June quarter.
Powered by an army of low-cost, English-speaking workers, the outsourcing sector provide services ranging from managing complex computer networks and call centres to software coding and maintaining technology operations of global corporations.
The sector’s scorching pace of growth has halted as many top customers are struggling to stay afloat, have gone bankrupt, or are tackling severe cost cuts, leaving little room to boost technology spending.
Research firm Gartner expects global IT spending to fall 6% in 2009, sharper than an earlier forecast of 3.8%, due to the economic downturn. “Visibility for fiscal year 2010, as of now, remains hazy and any global economic improvements are likely to take time to reflect in fundamentals,” Harit Shah, a sector analyst with Angel Broking, wrote in a report.
“We expect pricing to witness a downward trend, as has been the case over the past several quarters now.”
In June, Tata Consultancy said a slowdown in global demand for outsourcing had halted, but clients were still demanding lower prices and were cautious in their technology spending. Infosys, which stunned the markets in April when it forecast its first decline in annual revenue, may project a smaller drop in dollar revenues due to favourable exchange rate movements, brokerages said. Emkay Global said Infosys could forecast a fall of between 1-4% in annual dollar revenue in 2009/10, smaller than its April forecast of a drop of 3.1-6.7%, after the dollar fell against the euro and the British pound in the June quarter.
But the sector’s rupee profits would be hit by the Indian currency’s rise of nearly 6% against the dollar in the June quarter, brokerages said.
Tata Consultancy, Infosys and Wipro are looking to expand in markets such as Europe, Latin America and Asia Pacific to cut their dependence on the United States, which accounts for more than half the sector’s revenue. Indian IT services firms, which count Citigroup, General Electric, BT Group Plc, General Motors, and Boeing among their clients, face competition from big players such as IBM and Accenture.
The competition is expected to intensify after smaller local rival Tech Mahindra acquired Satyam Computer Services, renamed as Mahindra Satyam, in an auction in April.
Shares in Infosys, valued in the market at about $21 billion, rose 34% in April-June and Tata Consultancy gained 44%, compared to a 44% advance in the sector index and 49% in the main index.