Trouble Ahead for Indian Outsourcing

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Includes: ACN, CTSH, G, IBM, INFY, SYNT, WIT
by: Eric Savitz

It was a rough Monday morning for the Indian IT outsourcing sector, which was been hit hard by a highly negative report from Wachovia analyst Edward Caso.

Caso says the group is likely to take another leg down, forecasting that April conference call season will see most of the companies issue guidance below Street expectations. He writes that “demand remains lackluster and decision making slow.” Customers budgets are down 10%-20% this year, he contends, but with many operating on a month-to-month basis and focused solely on cutting costs. Caso writes that he is hearing that pricing has come down close to 10%, and that existing contracts are being repriced. He also says the sector is seeing increasing competition for deals from Accenture (NYSE:ACN) and IBM.

Caso cut his ratings today on Cognizant (NASDAQ:CTSH), Wipro (NYSE:WIT), Infosys (NASDAQ:INFY) and Syntel (NASDAQ:SYNT) to Underperform from Market Perform. He also reduced EPS estimates for all four companies. Caso said the stocks could see another 15%-30% decline from Friday’s close.

Meanwhile, Kaufman Bros. analyst Karl Keirstead Monday morning also warned that current offshore outsourcing bookings activity remains depressed, and that pricing pressure of 5%-15% “has become commonplace,” and that client budgets this year could be down 10%-15%. “In a nutshell, demand does not appear to be stabilizing just yet,” he writes. “The gap between what we are hearing from our sources in the field and the guidance offered by vendors is widening.” And not in a good way. Keirstead maintains Hold ratings on Infosys, Cognizant and Genpact (NYSE:G), asserting that “patient investors will have a better entry point to build or add to a current position after the tough demand backdrop lowers company guidance and/or investor expectations further.”

In Monday’s trading:

  • Cognizant was down 86 cents, or 4.7%, to $17.54.
  • Wipro was down 58 cents, or 10.2%, to $5.11.
  • Syntel was down $1.64, or 8.1%, to $18.70.
  • Infosys was down 64 cents, or 2.6%, to $23.56.
  • Genpact was down 6 cents, or 0.8%, to $7.86.

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