Infosys signals rebound in offshoring

Hiring by Indian outsourcers is now at levels comparable to hiring before the recession

Infosys Technologies posted strong revenue and net profit growth in the quarter ended Sept. 30, as its customers started placing orders that were postponed during the recession.

India’s second largest outsourcer, on Friday reported revenue of $1.5 billion for the quarter, up 29.6 percent over the same quarter last year. Its net profit grew 18 percent in the quarter to $374 million.

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Infosys’ results are expected to be in line with those of its key Indian competitors, Tata Consultancy Services, and Wipro, which will announce their results later this month.

Their improved performance is reflected in an increase in hiring. Hiring by Indian outsourcers is now at levels comparable to hiring before the recession, said Amitabh Das, chief executive officer of Vati Consulting, a recruitment firm in Bangalore.

Analysts however warn that Indian outsourcers could see their margins shrink as they face competition in the medium and long term from multinational services companies that have offshore operations. Their costs are also likely to go up as they start setting up larger operations in the U.S., to counter the current protectionist sentiment in the country, said Jimit Arora, research director at Everest Group.

Customers are also reducing the number of their suppliers. This will translate into increased volume of business for the suppliers that are retained, but customers are also likely to ask for deeper discounts in pricing, Arora said.

Infosys said that revenue for the fiscal year ending March 31, 2011, is expected to grow by between 24 to 25 percent to about $6 billion. Revenue in the current quarter is also expected to grow by 25.6 to 26.8 percent.

The company's results for the quarter are in accordance with International Financial Reporting Standards (IFRS).

The quarter to Sept. 30 is typically the strongest quarter for Indian outsourcers, Arora said. A lot of the revenue growth in fiscal 2010 is coming from pent up demand for offshore services, which was postponed during the recession, he said. The revenue growth rate for Indian outsourcers is likely to go down to an extent by the next fiscal year, he added.

Infosys said the business environment continues to be challenging. The continued global economic uncertainty, coupled with extreme currency volatility, is a concern for the industry, it added.

A key challenge for Indian outsourcers is also likely to come from moves by the U.S. to restrict offshore outsourcing to protect local jobs. The state of Ohio recently banned offshore outsourcing by state government agencies. The move by Ohio has alarmed Indian outsourcers as it comes after the U.S. passed legislation that increased visa fees to pay for border security.

Customers still continue to see value in offshoring to countries like India and the Philippines, Arora said. They are however still cautious about their spending, and business from Europe is still uncertain, he added.

Indian outsourcers are meanwhile hiring in anticipation of new business. Infosys added 7,646 staff in the quarter, taking the total to 122,468 employees as of Sept. 30.

As hiring picks up, Indian outsourcers are also relying on contract staff to cut costs, and to meet staff requirements for short-term contracts, Das said.

About 10 to 15 percent of outsourcers’ staff are contract staff which are available at cheaper rates than staff on the company’s rolls, according to Das. Typically people on contract are those who did not get permanent jobs, and have less specialized skills, he said.

Outsourcers are trying to cap salary hikes in the 15 to 20 percent range, Das said.

The salary costs of their Indian staff is a small proportion of the total costs for Indian outsourcers, Arora said. So a salary hike in India is not a big hit on margins, he said. Most of the companies are hiring university graduates, 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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