India's Outsourcing Star Still Shines

By Eugene Bukoveczky | October 19, 2010 AAA

After being stung by last year's slump in global tech spending, India's bellwether IT outsourcers have roared back with a vengeance, helping India's broad market index the BSE Sensex, hit a 33 month high. (To learn more about other types of leading indicators, see Leading Indicators Of Behavioral Finance.)

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Rising Estimates
Blue chip outsourcer Infosys Technology (Nasdaq:INFY), recently joined U.S. tech giant Intel (Nasdaq:INTC) in signaling a revival in technology spending around the world, when it announced quarterly sales estimates and raised its full-year sales forecast. The company, which gets two-thirds of its revenues from the U.S. and includes companies like BP plc (NYSE:BP), BT Group (NYSE:BT), IBM (NYSE:IBM) and Accenture (NYSE:ACN) among its customers, now expects its dollar revenues to rise 24 to 25% in its fiscal year ending in March 2011 versus market forecasts of 21 to 24%.

But while Infosys shares have been on a tear over the last few months reaching a record high late last week, investors used the positive news as an opportunity to lock in profits and sold the stock down by about 3%.

Rising Rupee Threatens Outsourcers' Profitability
One possible trigger for the mini-selloff may have been the cautious comments coming from Infosys management regarding the impact the soaring Indian rupee could have on the company's margins. Like many other world currencies, the rupee has risen sharply against the U.S. dollar. Over the last two years it has climbed from about 52 rupees to the dollar to its current level of 44 rupees making it the best performing Asian currency against the greenback. In the last month alone it has gained more than 5%.

Other leading Indian outsourcers like rivals Tata Consultancy and Wipro (NYSE:WIT) are also likely to see their margins squeezed if the rupee continues to appreciate. Both companies will be reporting their results next week.

India's Central Bank Ready to Intervene
But these currency-related fears could be somewhat overplayed at this point, as warnings by India's leading exporters, which includes the outsourcing sector, appear to be registering with India's central bankers. They now appear to be willing to intervene in currency markets to halt any further rise in the rupee. A target rate of between 43 to 45 rupees to the dollar is now being defined as a comfortable range.

The Bottom Line

The uptick in global IT spending reflects a degree of pent-up demand following last year's spending slump. When combined with the effect of spending related to the normal upgrading process, it should allow India's outsourcers to report strong revenue growth well into next year. Now that Indian central bank has signaled a willing to keep a lid on the value of the rupee, that should mitigate against any further squeeze on margins and help the outsourcers convert this new wave of IT spending into higher profits.

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