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Infosys, TCS feel the heat of competition worldwide

business Updated: Apr 12, 2012 14:13 IST

India's leading software exporters are expected to face a challenging year ahead due to growing competition, an uncertain global economy and rising US rhetoric against shipping of jobs to low-cost locations ahead of the November presidential election.

That may well take the shine off strong January-March results for companies such as Infosys and Tata Consultancy Services, which benefited from cost-conscious customers bumping up demand. The results are set to be released over the next few weeks.

Investors will focus on what the companies in India's $100 billion information technology and back-office services outsourcing sector project for growth, their hiring plans as well as comments on the pricing environment and outlook for discretionary spending by clients.

"They need to have visibility, which is somewhat marred by the pretty volatile situation in the United States and Europe," Dhiraj Sachdev, a senior fund manager at HSBC Asset Management, said, referring to the Indian software firms.

"Business confidence is also fluctuating," he said. "In such a scenario, customers are also very hesitant on how to go about their (technology spending) budgets." Global investor sentiment has turned fragile after recent data, including a weak March United States jobs report and renewed concerns on European sovereign debt highlighted risks to the nascent global economic recovery. The Indian outsourcing industry gets about three-quarters of its revenue from the United States and Europe.

Reflecting the concerns on the sector's outlook, shares of IT companies have been laggards in 2012. Shares of Infosys, which has a market value of about $31 billion, are up a modest 1.6% this year, while those of Tata Consultancy are down about 2 % and the sector index has added 4.3%.

By comparison, the main 30-share Bombay index has gained about 11%.

Infosys, which will report fourth-quarter results on Friday, has "potential to surprise," with a forecast of 13% to 16% rise in dollar revenue for 2012/13, Standard Chartered analysts Pankaj Kapoor and Apoorva Oza wrote in a research note.

Worldwide IT spending is forecast to increase 2.5% in 2012 from a year ago, research firm Gartner Inc. said on Apr 5, lower than its January forecast of 3.7% growth. The cut in forecast is due to a strong US dollar, it said.

Protectionist measures

Tata Consultancy, Infosys and no 3 exporter Wipro are also facing increased competition from bigger global rivals such as IBM and Accenture for a bigger share of the outsourcing business.

The competition for the leading Indian software companies is likely to intensify after smaller rival Tech Mahindra last month bought the remaining stake in unit Mahindra Satyam , becoming India's no 5 software exporter by revenue.

Fears of protectionist measures ahead of the US presidential election is also an overhang for the sector, with President Barack Obama sharpening his criticism of US firms 'exporting' jobs.

The US administration seeks to tax those firms more and use that money to help those that keep jobs at home.

Infosys, which is also listed on the Nasdaq stock exchange , is expected to post a 27.5% rise in profit in the quarter ended March to 23.18 billion rupees ($451 million), according to Thomson Reuters data.

Sector leader Tata Consultancy is seen reporting a 22% rise in quarterly profit to 29.28 billion rupees, while Wipro should see a 9.5 % increase in profit to 15.05 billion rupees, the data showed.

Tata Consultancy will report on April 23, followed by Wipro on April 25.