India's Economic Ascent: Staying Strong Through the Financial Downturn

by Tony D'Altorio

India's Economic Ascent: Staying Strong Through the Financial Downturn

by Tony D'Altorio, Investment U Research

Friday, July 30, 2010

Some 30 years ago, some tech-savvy people in India surprised the business world.

They set up back offices for western multinational corporations. And so, the Indian IT industry came about.

Today, it remains one of the most exciting business stories in the country.

So far, it has managed to stay relatively unshackled by government intervention and control. And in that, it symbolizes the new India. Independent, self-confident and ambitious...

India's IT Industry

India's information, technology and outsourcing industry makes good money. Generating annual revenues of over $60 billion, it has largely driven the country's economic ascent.

It has grown remarkably well too. Take Infosys Technologies ADR (Nasdaq: INFY), which increased earnings at an average 60% per year from 1996 to 2004. Then, from 2005 onward, it still locked in growth of 36%.

And even though the industry gets most of its revenue from the U.S, Canada and Europe, it has stayed strong throughout the economic downturn. If anything, it became more efficient, tailoring services to help their clients survive the recession.

As a result, Indian IT companies' first quarter results look impressive.

The country's largest outsourcing company, Tata Consultancy Services, beat forecasts. So did Wipro Technologies ADR (NYSE: WIT), the third largest. And surprisingly enough, much of their success came from the U.S.

Infosys, which ranks number two, did report a small drop in net income due to currency movements. But revenues picked up strongly and the company lifted its growth forecast to 20% from its April projection of 17%.

That surprised Wall Street, which expected the European debt crisis and a strengthening rupee to hurt the entire sector. Yet despite all that, investors still pocketed total returns of 60% - 100% from Tata, Wipro and Infosys.

Global IT Industry Spending on the Rise

Forrester Research reports that global IT spending is expected to grow 9.3 per cent this year from an estimated $1.4 trillion in 2009. Much of that should come from a rebounding financial services industry, IT outsourcer's most valuable clients.

And emerging markets should play their part too. Along with other global entities, Indian IT companies want to expand ties in Asia, Latin America and the Middle East.

They have good reason for that too. Just take Wipro, which expects most of its forecasted $1.25 billion revenues in the next quarter to come from the Gulf region.

Similarly, seven years ago, Tata Consultancy took revenues of $100 million from emerging markets. Today, it makes $1.2 billion from them.

In the long term, those areas are expected to contribute about 20% of its overall revenues.

Tata particularly likes Latin America, where it has seven service centers. Its revenues from the region are well over $300 million. And it believes the region can easily become a $1 billion market in the medium term.

As Rising Costs Take Their Toll...

Of course, there's always a bearish argument for every high-flying investment. And rising costs have taken their toll already on India's IT companies.

For instance, in the past six months, Tata, Wipro and Infosys each had to increase pay by 10% - 20%.

Tata has already projected spending $200 million on salary raises in the next fiscal year. It suffered an employee attrition rate of 13.1% despite offering higher wages during the last quarter.

Infosys, on the other hand, has offered the highest salary increases of its top competitors. It hopes the move will keep employees satisfied and loyal.

Those companies have good reason to continue doing just that. Many technology sector insiders estimate that costs related to poached employees hit a record $2 billion in the past six months.

Now that hurts.

Still, they don't seem too worried for now. In fact, each of them plans to hire more than 35,000 people this year to sustain their double-digit growth.

So while those costs could bite them sometime well down the road, right now, they make excellent investments.

Good investing,

Tony Daltorio

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