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By Audrey B.

While India is undisputedly the current top outsourcing destination in the world, an appreciating rupee, increasing labor costs and higher attrition levels are now weighing heavily on outsourcers with their businesses in India. The country is already falling behind in terms of call center outsourcing with the emergence of the Philippines at the forefront, and now with the release of Infosys’ (INFY) quarterly results, it has made these setbacks more evident.

India’s number two software exporter and outsourcing services provider, Infosys, released on the 13th of January its third quarter results for FY2011. The company reported a 14.2% rise in net profit, which fell behind analyst estimates, coming in at a profit of 17.8 billion rupees below the 18.2 billion estimate in a Reuters (TRI) poll. The company however still raised its dollar sales growth forecast for FY2011 in the year ending March to 25.7% - 26.1% from the 24% - 25% forecast in October.

There were high hopes for the company especially with the current uptick seen on the spending for outsourcing technology services in the past quarters. The major Indian outsourcing companies in the technology sector were expected to show robust growth with the increased demand for their services and to ramp up hiring and raise wages to meet the demand.

But as the Infosys results show, while forecasts were optimistic and demand is not waning, at least for the short term, the appreciating rupee still presents a significant hurdle among outsourcers. Expectations for other fellow outsourcers such as Tata Consultancy Services and Wipro will likely be affected as well. According to Infosys CFO, Vibin Balakrishnan, “Uncertainties related to sustainability of the global economic recovery could create greater currency volatility in the near future.”

It doesn’t help matters that competition is increasing among other global outsourcing providers such as Accenture (ACN) and IBM (IBM) as brought about by the increase in demand and the steady economic recovery. With the currency gaining strength and costs rising, the cost of outsourcing services will expectedly also rise.

Amid concerns however, the tide seems to be turning for India on the European front. Although the United Kingdom has proven to be a tough market to enter for India, local support in the form of the British council as well as Britain’s National Health Services Administration just might help Indian outsourcing companies to get their foot in the door and attract more business from the United Kingdom, thus creating bigger competition for other outsourcing companies in the region such as Logica (LON.LOG), Atos Origin (EPA.ATO) and Capgemini (Paris.CAP).

But while the tide may be turning, it did not help Indian outsourcing company, HCL Technologies to win a $600 million five-year outsourcing contract with European steelmaker ArcelorMittal (MT), which chose the Virginia based Computer Sciences Corporation (CSC) over HCL Technologies on the 13th of January. HCL Technologies alongside fellow Indian outsourcer Wipro (WIT), as well as HP (HPQ), IBM and Capgemini were CSC’s competitors in the bidding.

With the earnings reporting season just under way, there may be hope yet for India and its outsourcing companies to bounce back and beat market expectations. With 2011 barely begun and the economic recovery continuing, prospects for India may still improve. We’ll have to wait and see how the other companies fare.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Infosys' 3Q Results Underscore Setbacks for India as Outsourcing Destination