Wednesday, October 10, 2007

Indian outsourcers not yet hit by weak dollar

Infosys Technologies Ltd., India’s second largest outsourcer said Thursday that its margins have actually improved in spite of the appreciation of the Indian Rupee against the US dollar. Yesterday another outsourcer, iGate, said its performance was not affected by the weakening dollar.

A weakening dollar impacts Indian outsourcing companies because over 50 percent of their business comes from the US, and is billed in dollars. The work is delivered offshore from India, where the payments to staff and other services are in Indian Rupees. Because of the weakening dollar, Indian companies now have fewer Rupees for every dollar earned abroad.

Indian outsourcers have however taken drastic cost-cutting measures and hedged on currency. In a business model that is cost-plus, where the key cost and input is software developers, the company cannot reduce its hires. But it can increase their productivity, and also shorten the bench – the number of staff kept idle to be able to meet any peaking in customer demand.

Infosys and iGate have also been aided by the willingness of customers to raise prices.

Infosys said its revenue for the July-September quarter was US$1 billion, up by 37 percent from the corresponding quarter last year. The company’s net income grew by 36 percent to $271 million during the quarter. iGate said net income went up 127 percent in the quarter, but revenue actually dipped. The company said there had been a delay in customers placing orders.

Tata Consultancy Services Ltd. (TCS) and Wipro Ltd, India’s largest and third largest outsourcing companies, are scheduled to announce their results next week. They may also report that they have countered the impact of the weak dollar by good currency hedging, and cutting costs.

For Indian outsourcers, the current problem is a sharp reminder of a problem that they knew all along. You can’t depend on one country for a majority of your business, even if it is the US. Indian outsourcers are now attempting to mitigate that risks by focusing on other markets like Europe and S.E. Asia. It comes at a good time when Europe is opening up to offshore outsourcing.

They are also looking closely at the Indian market, which they de-focused earlier because it didn’t pay well enough, and in dollars. Folks like IBM and Hewlett-Packard have in the meantime made deep inroads into the market.

These are trying days for Indian outsourcers, but these companies excel in their ability to respond quickly to the business environment, because of the strong processes they have in place. The Rupee is meanwhile expected to continue to appreciate as foreign capital inflows into India increase, and the country’s economy is booming.

Indian outsourcers not floundering, not migrating

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