Europe woes could hit Indian IT's recovery

BANGALORE, INDIA: India's leading information technology exporters should report robust quarterly sales, thanks to improving demand from their mainstay financial clients, but Europe's debt crisis and rising salaries could cap their outlook.

Tata Consultancy Services, Infosys Technologies and Wipro Ltd face uncertainty on orders from Europe - the second-biggest market for the sector after the United States.

"There has been no major impact on volume growth due to the crisis," said Harit Shah, an analyst with brokerage Karvy Stock Broking. "It could have an impact going forward, especially due to the euro. We will have to watch for what the management has to say."

Indian software services firms are ramping up investments to grow their market share in Europe, which accounts for about a third of their revenue. The U.S contributes more than half.

Research firm Forrester said in a report last week that Europe's volatile economic situation and uncertainty about corporate IT budgets would result in possible delays or cancellations of some outsourcing projects.

Analysts expect Infosys, which sets the tone for India's $60 billion outsourcing sector and counts BT Group and Goldman Sachs among its clients, to edge up its dollar revenue growth forecast for 2010/11 to 17-19 percent from the 16-18 percent estimated by the company in April.

Investors will focus on management comments on deal flows, the outlook for pricing and technology spending by their clients.

Growing competition from IBM, Accenture and Hewlett-Packard also pose a risk for the industry, which manages complex computer networks and maintains technology operations for Fortune 500 customers.

On Friday, Infosys shares rose as much as 2 percent to a record high of 2,882 rupees ($62) on optimism about its results.

"The indications we are getting is the pricing environment is stable and improving and the volume growth is good," said Jayesh Shroff, fund manager at SBI Mutual Fund.

"Of course, the macro headwinds are there. America is still improving, Europe is in trouble. But the demand from corporates has improved."

Last month, Accenture posted better-than-expected results, indicating continued business momentum.

Indian IT firms are boosting hiring and have raised salaries by 10 to 20 percent on average to keep staff from being poached by global rivals on strong demand in outsourcing.

Brokerage Macquarie said profit margins at Infosys and Tata Consultancy could drop by 200 basis points and 250 basis points, respectively, in the June quarter due to the wage increases.

The Indian rupee's 3.3 percent weakness against the U.S. dollar in April-June should partially counter the impact of salary hikes and euro volatility for Indian software exporters.

Shares in Infosys, valued at about $35 billion, have risen 10.2 percent this year and Tata Consultancy is up 3.3 percent, versus the 5.6 percent rise in the sector index and the main index's 2.1 per cent gain.