Wednesday, April 30, 2008

Market Spotlight: Indian outsourcing firms

Source : Click

Indian outsourcing firms are feeling some pain from weak dollar

The outsourcing of technology jobs has been a lucrative and controversial trend over the past 10 years. But with the dollar declining against foreign currencies, it's getting more expensive for U.S. firms to pay for foreign labor, a factor that has increasingly become a source of concern for Wall Street analysts.

According to Janney Montgomery Scott analyst Joseph D. Foresi, outsourcing is based almost solely on labor arbitrage; if U.S. companies can hire labor cheaper in India and other developing countries, they will continue to take their business there.

"So far, there has been a pinch on margins for U.S. companies, but it is still less expensive for them," he said.

There has even been some relief as the rupee depreciated against the dollar during the quarter ended March 31, making it more affordable for U.S. companies to hire Indian firms. A drop in the rupee's value has not come fast enough for Satyam Computer Services Ltd., one of India's largest technology outsourcing companies. Its U.S.-traded shares fell more than 5 percent April 22 after the company reported fiscal fourth-quarter profit below Wall Street expectations.

Goldman Sachs analyst Thomas Quinteros said that "rapid appreciation of the Indian rupee" has been one of the key risks for Satyam Computer Services Ltd., one of India's largest technology outsourcing companies. Satyam last week reported fiscal fourth-quarter profit that missed Wall Street estimates.

The results were not that surprising -- in February, Satyam's chairman said he expected "significant implications" from the U.S. economic downturn for Indian outsourcing companies.

The majority of Satyam's sales are from the U.S. The company provides data-warehouse, systems integration, software development and other information technology services to General Electric, the U.S. government and other major clients.

Banc of America Securities analyst Abhishek Gami said the stock has been a strong performer but fundamental gains may be difficult because of the weak dollar, wage inflation and the need for expansion beyond the U.S. market.

Gami acknowledged the newly weakened rupee has "turned into a tailwind" for Indian companies.

"Though the rupee depreciation is not significant enough to deliver major margin upside, at least...offshore vendors have been saved from this source of margin headwind," he said.

While the rupee stabilized in the last quarter , the weak U.S. economy is also bad news for U.S.-reliant outsourcing businesses like U.S-traded Wipro Ltd., which includes General Motors, Sony, and communications company Nortel among its customers.

According to Wachovia Securities analyst Edward S. Caso, Wipro is expecting muted growth in the first half of fiscal 2009 because of ongoing U.S. economic turbulence. A customer has already canceled a major project while other customers have said they want to defer projects.

While both Satyam and Wipro are hoping to ride out any rupee appreciation and the U.S. economic weakness, they are hoping for a turnaround later this year or 2009.

Wipro management has, says Caso, "emphasized the pause nature of new business, not its elimination."