News

Indian Software Firms See Profits Surge

• By The Associated Press
• April 26, 2007

The figures underscore how rapidly U.S. and other Western companies are shifting work to low-cost India, where outsourcing is no longer limited to call centers or back office work such as billing and salary records.

Companies like Tata Consultancy Services Ltd. and Infosys Technologies Ltd. now have thousands of engineers developing software to improve corporate productivity and manage information technology infrastructure.

And despite concerns that rising salaries, a possible slowdown in the U.S. economy and the rupee's strength against the dollar would hurt business, the latest earnings figures -- released over the past two weeks -- show that profits are surging.

Net profit for the top five outsourcing companies -- Tata Consultancy, Infosys, Wipro Ltd., Satyam Computer Services Ltd. and HCL Technologies Ltd., ranked in that order -- grew to a collective $3 billion for the fiscal year through March, up 47 percent.

Sales, meanwhile, jumped 41 percent to a combined $13.6 billion.

And the top four software companies won 713 new clients last year. A figure from HCL Technologies was not available.

"We are seeing robust growth," Infosys Chief Executive Nandan Nilekani told reporters when his company reported a 70 percent year-on-year surge in profits during the January-March quarter.

Nilekani's confidence appears rooted in the strong economic rationale of the outsourcing business: Western companies will keep shifting jobs overseas so long as they can get the same work done for less money elsewhere.

Indian companies have set up centers in other low-cost countries like Vietnam and Romania so to stay competitive despite rising salaries at home. As a result, they are hiring more people in these countries.

Nearly 10 percent of Tata Consultancy's employees are now foreign nationals. For Infosys, the number is close to 3 percent.

The outsourcing portfolio has also expanded over the years to increasingly include high-value services, thus enabling Indian companies to charge higher fees and partially offset the impact of a weaker dollar and increased wage costs.

Tata Consultancy, India's leader in the field, had sales of more than $250 million last year managing IT infrastructure of its client companies, said Ashwin Mehta, analyst at Mumbai-based brokerage Ambit Capital.

HCL Technologies said its focus on remote infrastructure management services -- which may include everything from help in installing new software to monitoring network security -- helped in winning several large multiyear deals last year.

"The deal sizes are getting bigger," said Mehta.

Tata Consultancy won 12 outsourcing orders worth more than $50 million each last year, while Wipro Ltd. won 10 such deals. Both companies said they are aiming to win similar contracts this year.

"We believe that we have the right ingredients to keep winning," Wipro Chairman Azim Premji said after the company announced its latest earnings.

To keep the momentum going, Indian software companies are also looking to win more customers outside the United States, traditionally the largest client country.

They have acquired businesses in Europe to increase visibility there, set up centers in Latin America and are also winning orders from Australia and New Zealand.

Diversifying helps hedge against a possible slowdown or a potential political backlash in the United States.

Besides Indian companies, IBM Corp., Accenture and EDS Corp. are also expanding their off-shore centers in India, hiring tens of thousands of new employees.

The boom in outsourcing underlines the increasing globalization of labor, which has helped corporate profits -- in both rich and poor countries -- rise faster than labor costs, said D. Subbarao, a member of the India's prime minister's advisory council.

According to a recent International Monetary Fund report, the share of labor in total economic output of rich countries fell over the past two decades because of technological progress and outsourcing, with Europe accounting for the biggest drop of about 10 percentage points. But pay in emerging countries such as China and India has seen robust growth, the report said.

Subbarao fears there could be a backlash from U.S. labor groups, which could cause Washington turn more protectionist in the run-up to next year's presidential elections.

In 2004, a Democrat campaign against outsourcing saw several states reverse plans to transfer some of their back-office work to places like India. The impact on India's outsourcing companies was limited though.

"These are temporary blips on the long road to globalization," Subbarao said.