Indian outsourcers expected to report weak Q2 revenue growth

A slow recovery in the U.S. and the debt crisis in Europe is likely to have affected business

A slow recovery in the U.S., the debt-crisis in Europe, and slowing growth in the domestic market is likely to have slowed down revenue and profit growth in U.S. dollar terms at Indian outsourcing companies in the second quarter, according to analysts.

"Year-on-year growth in the quarter is likely to be in the single digits, as the market is very sluggish, and clients are not doing many deals," said Sudin Apte, principal analyst and CEO of Offshore Insights, a research and advisory firm. One or two companies may post higher growth than that because of a large deal they may have bagged, but it would not be an indication of a trend, he added.

In difficult times, customers look for technologies and services like SaaS (software as a service), platform-based services and specialized back-office services that can immediately address their business needs cost-effectively, but Indian companies, focused on bespoke software development and services, have been slow in making an impact in these areas, Apte said.

"We believe that the market is seeing some softness in demand currently due to multiple factors," said Jimit Arora, practice director at Everest Group. Besides uncertainty in Europe and the lagging economic recovery in the U.S., there is also uncertainty in the healthcare and BFSI (banking, financial services and insurance) sectors, two of the largest vertical segments for outsourcing, he added.

Slower growth in discretionary spends and continued delays in spending decisions have likely impeded revenue growth, said Dipen Shah, IT analyst at Kotak Securities in a statement.

Revenue growth in Indian rupee terms may however be higher because of the depreciation of the rupee against the dollar, according to analysts.

India's second largest outsourcer, Infosys, is scheduled to announce its quarterly results this week, against the backdrop of a slide in the growth in India's gross domestic product to 5.3 percent in the first quarter, and sluggish offtake in the U.K. and Europe which are still the largest markets for Indian outsourcers.

Infosys said in April that it expected its revenue growth in the current fiscal year would be between 8 and 10 percent. Its revenue grew by 16 percent in the previous fiscal year.

Wipro, another large outsourcer in Bangalore, said in April that its revenue for the first quarter from its IT services business was US$1.54 billion, up by 9.7 percent from the same quarter last year. The company posted revenue growth of over 20 percent in its IT services business in the same quarter last year, and has seen growth declining steadily since then.

Unlike earlier when the entire outsourcing industry rose or fell together, companies are now responding differently to market conditions.

Infosys and Wipro are facing challenges due to company-specific issues, Arora said. While Wipro seems to be re-building, Infosys continues to face challenges in demand with customers waiting for certainty in a visa lawsuit against the company before deciding on specific projects, he added.

Jay Palmer, an Infosys employee, filed a lawsuit last year against Infosys, in which he alleged that he was harassed after refusing to help the company use B-1 visas, a business visitor visa, for work he claims needed an H-1B work visa. Infosys is also the target of a federal investigation in this connection.

Tata Consultancy Services, India's largest outsourcer, and Cognizant Technology Solutions seem to be doing well, though it could face some impact of the slowdown in demand from large financial institutions, Arora said. "Expect them to deliver 3 to 5 percent sequential growth," he added.

John Ribeiro covers outsourcing and general technology breaking news from India for The IDG News Service. Follow John on Twitter at @Johnribeiro. John's e-mail address is john_ribeiro@idg.com

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