Going Remains Tough for India Outsourcing Providers, Say Analysts

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In late 2007, Indian outsourcing providers posted decent financial results but lowered their earnings guidance, leading many analysts to question whether they could sustain growth in the face of market pressures such as a slowing U.S. economy and a strong rupee.


At that time, analyst CLSA Asia-Pacific Markets predicted a "... period of uncertainty and volatility -- that may extend into 2008� for the outsourcing sector. In December, however, several Indian providers said their business was not yet suffering. Several of them did express concern over the U.S. dollar's decline against the rupee.


The market forces appear to finally be catching up with the Indian companies, reports PC World. India's National Association of Software and Service Companies (Nasscom) predicts software and services revenue will grow between 21 percent and 24 percent this year, down from 28 percent in the previous fiscal year.


While the domestic market for software and services is growing strongly, it still accounts for just a tiny portion of most Indian providers' business, says Siddharth Pai, a partner at Technology Partners International (TPI). The domestic market saw a 26 percent increase in the past fiscal year, to $11.6 billion. Exports grew 29 percent, to $40.4 billion.


Breaking out the export numbers: IT services grew 28 percent to revenue of $23.1 billion. BPO revenue increased 30 percent, to $10.9 billion. Engineering services and products grew 29 percent, hitting $6.4 billion.


Analysts don't seem optimistic about the forthcoming round of financial results from Indian service providers, which will be released later this month. While these companies have been working hard to diversify their offshore delivery model by expanding their operations in countries other than India, they may need to further broaden their customer base. An article in The Economic Times implies that Indian companies may not fare as well financially in the near term as their multinational competitors because of their heavy exposure to the financial services industry, which is still reeling from the credit crisis.


Accenture, which derives just 16 percent of its revenues from the financial services industry, posted one of its best quarters in its recent memory with a 36 percent growth in earnings and a 20 percent growth in revenues, according to the article. Indian outsourcing giants rely much more heavily on the financial services segment. It accounts for some 43 percent of Tata Consultancy Services' revenues and similarly large numbers at Infosys Technologies (34 percent) and Wipro (24.5 percent).