More outsourcing, more profits for India Inc.

Anshuman Daga

BANGALORE: Leading Indian software exporters, such as Infosys Technologies Ltd, are expected to report quarterly profit rises of up to 31 percent on robust outsourcing demand from overseas clients.

But billing rates are under pressure and wage costs are rising in a hotly competitive market, posing risks for Infosys, which will kick off the earnings season on Friday, and rivals Wipro Ltd and Satyam Computer Services Ltd.

And a surge in the stock prices of these companies from May lows after Infosys said its growth rate was slowing, suggests markets have already digested much of the good news.

"Decision cycles at many clients have speeded up and projects that were delayed are picking up," said Sandeep Dhingra, software services analyst at JP Morgan Securities Singapore Pvt Ltd.

"What we need to know now is what will be the change in pricing expectations going forward," he said.

Indian firms are on a hiring spree, emerging as one-stop shops combining software with back-office services such as payroll processing for global giants such as American Express Co, General Motors Corp and Cisco Systems Inc in what is one of India's hottest export sectors.

On the back of the boom in outsourcing, privately held Tata Consultancy Services, the country's largest software services company, is expected to launch a 32 billion rupee ($700 million) IPO before the end of March next year, analysts said.

Infosys, which ranks as India's second-largest software exporter after Tata and is a showpiece of India's software revolution, will set the tone with results on Friday.

A Reuters poll of 17 brokerages released on Wednesday estimated the bellwether firm's profit in the second quarter ended September 30 at 2.95 billion rupees ($65 million), up 6.1 percent from the previous quarter and 30.7 percent from the year earlier period.

Revenue at the Nasdaq-listed firm was expected to be up 5.6 percent on the quarter to 11.42 billion rupees, and 30 percent higher on the year.

HALO GONE

Analysts expect the company to raise its full year earnings per share forecast by about four to five percent to between 175 and 177 rupees.

Infosys beat estimates and increased its annual profit growth estimate to 17 percent from a previous 13 percent when it last released quarterly results in July.

Shares of Infosys have rallied 37 percent in the past three months, outperforming a 33 percent rise in Bombay's Infotech index and a 28 percent increase in the broader 30-share index.

But in the calendar year so far, the infotech index has lost 10 percent compared with a 38 percent surge in the main index.

"The story is building up for growth and markets are looking to Infosys to deliver," said Ashim Syal, chief investment manager at ING Vysya Mutual Fund, which has about $12 million in Indian equities, with about 30 percent invested in software stocks.

Software shares have rallied in recent months on expectations for quick growth after lagging the broader market till June. Infosys shares are trading at 27 times estimated full year earnings while Satyam Computer Services is trading at roughly 16 times forecast earnings.

Strategists, however, said a bullish outlook for the farm-dependent Indian economy meant investors had many sectors to choose from in a booming stock market.

"The halo around the technology sector is no longer there and the once-high growth rates are limited to a few players," said Jamshed Desai, head of research at TAIB Securities.

The Reuters poll forecast sales at Wipro, the No.3 exporter, to grow most on the quarter at 9.5 percent while Satyam, the fourth largest, is seen reporting just a 1.6 percent rise.

"The simple growth driver at this point is cost and quality," said Avinash Vashistha, managing director of NeoIT, a technology consulting firm which counts Exult Inc among its clients.

© Reuters