Looks like the Indian outsourcing juggernaut may finally be running out of steam. After years of steady growth based on its huge labor cost advantage, the impending global IT spending slump makes it unlikely that India's high-tech outsourcing business will maintain its historical revenue and earnings momentum. That's the takeaway from the recent guidance offered by the sub-continent's top IT outsourcers.
IN PICTURES: Eight Ways To Survive A Market Downturn

Global IT Cutback
The first indications of troubled times came from Infosys (NASDAQ:INFY), India's second largest outsourcer. Last week, the company disclosed that it expects revenues for its next fiscal year to decline between 3.1% and 6.7%, which is the first such drop in the company's history. The reduction was prompted by the unavoidable reality that the company's clients, 90% of whom are located in the U.S. and Europe, have materially cut back their IT spending budgets. According to the company's own survey data, clients that account for about 83% of its revenues indicated that they would cut outlays on IT by up to 10%.

Price Cutting Necessary
The impending slowdown in business volumes could also lead to additional pain in the form of price cuts, according to industry heavyweight Tata Consultancy (NSE:TCS.NS). Recently, Tata Chief Operating Officer (COO) N. Chandrasekaran indicated that clients were already negotiating price cuts for the the services they received.

Wipro (NYSE:WIT), the number three outsourcer, managed to beat expectations with its latest quarterly earnings result, but this company also had to concede to client demands for price cuts. It now forecasts revenues to decline in the next quarter. (Explore the controversies surrounding companies commenting on their forward-looking expectations in Can Earnings Guidance Accurately Predict The Future?)

All of these views echo warnings raised earlier by IT research firm Gartner Group, who predicted that the price of IT outsourcing services would shrink by 5% to 20% through 2010.

Increased Competition
Increased competition coming from recently rescued former number four outsourcing player Satyam Computer (NYSE:SAY) could add further downward pressure on pricing. Recently brought to the brink as a result of India's largest accounting fraud, Satyam was thrown a lifeline earlier this month when another Indian outsourcer, Tech Mahindra (NSE: TECHM.NS), which is 31% owned by British-based BT Group plc (NYSE:BT), acquired a 31% interest in Satyam. Tech Mahindra intends to boost its holding to 51% in order to obtain a controlling interest via an offer that begins June 12, and includes Satyam's U.S. ADR holders. The company counts Citigroup (NYSE:C) and Cisco (NASDAQ:CSCO) as clientele, and significant concessions may have to be offered by new management in order to keep them onboard.

The Bottom Line
While the weaker Indian rupee, which fell 4% during the first quarter on top of a 19% plunge in 2008, has so far helped prop up revenues and margins, it's unlikely to contribute much from this point forward. Inevitably, all the outsourcers will have to cut costs, and because the key input for many of these companies is human capital, it will involve cutting staffing levels. While reasonable reductions would be seen in a positive light, massive cuts, which now appear more likely given recent overhiring, could serve only to undermine client as well as investor confidence in these businesses.

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!