Indian IT Outsourcing Companies: Up to the Challenge

Includes: INFY, SAY, WIT
by: Kirti Deshmukh

Has the strength of the Indian IT outsourcing companies (Infosys (NASDAQ:INFY), Wipro (NYSE:WIT) and Satyam (SAY)) diminished? The answer is obviously no. The current turmoil with the credit crunch in United States, as well rupee appreciation, could have created the potential to hurt these companies’ bottom line in the near short term, but the results which will start coming in the next few weeks will show that in the long term these companies are the winners.

This was not first time these companies have been challenged –

First it was the Y2K/ burst of 2000/2001 – They learned a valuable lesson of not focusing on one area and started offering a wide array of solutions customized for a range of key verticals and horizontals; from strategy consulting to implementing IT solutions for customers, the result has been growth averaging 40 to 60 % year over year since 2001.

The second wave was during the 2004 US Presidential election when strong sentiments on outsourcing coupled with strong competition from global MNC was seen as threat to the growth of these companies. But these companies were smart and started recruiting local Sales/Marketing professionals, strengthening their marketing efforts and improving their brand image. Additionally, they started boosting near shoring/on shoring capabilities, further convincing customers that they would do everything needed to support the customers' business, resulting in larger contracts from the Fortune 500 companies and global leaders.

The current impact to the financial sector and rupee appreciation is believed to be impacting the bottom line. Once again, their proactive measures have proven to be helpful. Most of the companies have been hedging the currency variations and are also improving their productivity through employee empowerment and proper training. These techniques seem to be working with employee attrition reduced from what it was in 2005/2006. Additionally these companies are raising their billing rates ranging 4 –7 % (across the industry) that would compensate the erosion from rupee appreciation. BPO WNS’s (NYSE:WNS) growth this past week shows that as these companies report their earnings, fear of the credit crunch and rupee appreciation begin to erode.

Top Indian companies spent US$ 1.58 billion on IT systems in 2006-07, a growth of 27 per cent over the previous year. Additionally, small and medium enterprises (SMEs) in India are set to spend over US$ 8 billion in 2007-08 to beef up their IT infrastructure. Satyam,Wipro and Infosys, which all have a strong presence in India’s domestic market, will get a pie slice of this growth.

These companies are spreading their presence in emerging markets (Brazil, Mexico, Australia, Eastern Europe and China).

Time after time these companies have proven that they are capable of adapting themselves to the changing circumstances, forming strategic technology and marketing alliances with top-notch companies that help them provide end-to-end services to current customers, win new customers and maintain their project growth.

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