India’s outsourcing sector faces bleak outlook

Published by rudy Date posted on January 26, 2009

MUMBAI (AFP) – India’s software sector, reeling from a huge accounting fraud in one of its flagship companies, faces further problems as US firms scale back in a troubled global business environment, analysts said.

Two of India’s top IT companies — Infosys Technologies and Wipro — have acknowledged that their revenues are under pressure.

Meanwhile, India’s largest software exporter Tata Consultancy Services (TCS) saw its third-quarter net profit rise by a lower-than-expected 1.57 percent from a year earlier because of the global economic slowdown. It traditionally gives no guidance.

The flurry of dismal earnings news and a one-billion-dollar false accounting scandal at Satyam Computer Services earlier this month has combined to cool investor sentiment towards the once red-hot sector, which employs two million workers in India.

“We’re seeing a clear slowdown for the IT giants (in the latest quarter) and it’s not a surprise,” said Apurva Shah, head of research at brokerage Prabhudas Lilladher.

Brokerage firms and analysts say the outlook appears bleak for the top IT companies for at least the next two quarters.

“The near-term outlook for India’s IT sector is cautious and uncertain,” said Harit Shah, software analyst at Angel Broking.

“Revenue visibility has become hazier than ever. With the US economy likely to undergo an extended period of painful transition, any recovery is likely to take some while,” Shah said.

Infosys chief executive S. Gopalkrishnan said last week the budgets of overseas clients would be clearer by mid-February and they were expected to be “slightly less or flat”.

TCS does not forecast revenues but admitted it was “operating in a challenging environment”.

Infosys Technologies and Wipro said they lowered revenue guidance in their latest earnings forecasts because of the global economic situation.

Infosys’ full-year dollar guidance was cautious with revenues expected in the 4.67 billion dollars to 4.71 billion dollar range — representing growth of 11.8 to 12.8 percent, a far cry from earlier growth of plus 30 percent.

Meanwhile Wipro this week lowered its revenue guidance for the next three months to 1.04 billion dollars — below the 1.12 billion dollars it notched up in the three-months to December last year.

“While Infosys has twice cut its annual guidance in the year to March 2009, Wipro commented on the difficulty in giving guidance even for a quarter,” said analyst Abhiram Eleswarapu of BNP Paribas.

“We continue to be skeptical about Wipro’s prospects” as its clients “continue to face turmoil,” an analyst with BRICS Securities added.

Meanwhile, the National Association of Software and Services Companies (NASSCOM) lobby group has now delayed its growth forecast for India’s IT sector for the year to March 2010 due to the Satyam scandal.

India’s business community has been rocked by Satyam founder B. Ramalinga Raju’s declaration on January 7 that he had fudged the company’s accounts for years and that one billion dollars in cash on its books was non-existent.

A new set of auditors are now restating its earnings.

Uncertainty in the sector’s future business volumes could be compounded if outsourcing laws undergo a change now that Barack Obama has been installed as the 44th US president.

During his election campaign, Obama said he would offer incentives to companies that created jobs at home and halt tax breaks to those that ship work abroad.

Close to four-fifths of the world’s biggest companies outsource work to India, with about 60 percent of the contracts coming from the United States.

However, India’s IT firms have brushed off concerns that Obama would formally seek to curtail outsourcing.

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