NEW YORK (CNN/Money) -
Offshore outsourcing firms are feeling some heat from a U.S. political backlash and the rising Indian rupee, but if the earnings report of an industry bellwether Tuesday is any guidance, business is still pretty good and unlikely to suffer a major setback anytime soon.
Bangalore-based Infosys Technologies (INFY: Research, Estimates) said it earned $76.8 million, or 58 cents per American Depositary Receipt (ADR) in the quarter that ended in March, its fiscal fourth, compared with $53.1 million, or 40 cents per ADR, a year ago. Wall Street analysts, on average, expected Infosys to earn 56 cents per ADR, according to earnings tracker First Call.
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| | Company | | Price Change, Past 6 Months | | P/E Ratio | | LT Est. EPS Gr. Rate | | Cognizant | 6.7% | 39 | 30% | | Infosys | 8.5% | 34.8 | 27% | | Satyam | 34% | 26.4 | 19% | | Syntel | 9.4% | 28.1 | 20% | | Wipro | 23.4% | 37.3 | 28% |
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* All data as of 12 Apr. 2004; P/E based on calendar 2004 estimates | Source: Thomson Financial/Baseline |
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Several of the other firms in the industry, scheduled to report earnings in the next two weeks, will also remain fairly flush for years to come, analysts believe, as the stream of U.S. service jobs moving offshore continues.
Talking to Indian reporters Tuesday morning, Infosys Chief Operating Officer Kris Gopalakrishnan said a recent rise in the rupee was pinching profits and that the U.S. political debate over outsourcing was slowing down business, Reuters reported.
"Some of the larger business process outsourcing deals are getting delayed or being put on hold," Gopalakrishnan told Reuters.
He expected earnings per share growth to slow to a mere 20 percent this fiscal year, compared with 30 percent the year before. Revenue growth would be 30 to 31 percent, compared to last year's 33 percent -- not exactly the end of the world.
Other firms expected to report in the next several days include Bangalore-based Wipro Ltd. (WIT: Research, Estimates), which reports fiscal fourth-quarter earnings on Friday, and Hyderabad-based Satyam Computer Services (SAY: Research, Estimates), which reports next week. New Jersey-based Cognizant Technology Solutions (CTSH: Research, Estimates), and Michigan-based Syntel (SYNT: Research, Estimates), outsourcers with most of their employees in India, also report earnings next week.
All of them could speak of woes similar to those of Infosys, but none will fall off the table, analysts believe. Put simply, the outsourcing trend is here to stay.
"While there's a risk that political rhetoric may heat up as we get close to the U.S. presidential election, it's had no material impact on the tone of business for all of these vendors," said Mayank Tandon, an analyst with Janney Montgomery Scott. "Right now, demand is strong, and expectations are for revenue growth to be more than 30 percent per year for the industry in general -- that would be the forecast for the next several years."
Analysts noted that the political backlash hasn't yet translated in any meaningful way into actual laws. A few state governments have canceled contracts with outsourcing firms, but the vast majority of protectionist measures proposed in state and federal legislatures have died. And though some companies may be delaying outsourcing contracts, they probably won't be able to resist for long -- they'll just be quiet about it.
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"All the people I've spoken with, contacts in the industry, have been consistent in commenting that, from a customer perspective, they're not seeing any slowdown," said Sameer Nadkarni, an analyst at W.R. Hambrecht. "The interest is still there, the benefits are still there. Customers are more low-key in terms of publicizing that they're doing it, but they're still looking at it carefully."
Small but steady movement of jobs overseas
For all the attention outsourcing gets, you'd think there were millions of jobs moving overseas. In fact, there aren't -- not yet, anyway.
India's National Association of Software and Service Companies estimates only about 247,000 Indians are doing outsourced work for American firms, according to a Wall Street Journal report Monday. Other nations probably have smaller numbers.
These numbers are slowly growing. Infosys said on Tuesday that it added 9,800 people in its fiscal year and expects to add some 10,000 more this year. Among other large outsourcers, Wipro has said it added 2,872 in its third quarter and Satyam added some 1,087 in its third quarter.
Still, such numbers are drops in the bucket compared with the 131 million or so employees on non-farm payrolls in all of the United States, but the trickle should be steady -- some analysts expect hundreds of thousands of jobs to leave each year -- something that is likely to keep the outsourcing debate pretty hot.
Share gains slow from white-hot to red-hot
When CNN/Money last wrote about these companies, in early February, all were in the middle of a scorching run-up. Between early August 2003 and February this year, Syntel gained about 34 percent, Infosys jumped nearly 70 percent, Cognizant gained 82 percent, Wipro was up 109 percent and Satyam rose a whopping 130 percent.
Since then, the range of gains has shrunk to between 7 percent and 34 percent.
Much of this deceleration was likely due to a steady stream of anti-outsourcing vitriol from U.S. politicians during an election season that came at the tail end of the longest U.S. job-market slump since the Depression.
"The political rhetoric has taken its toll," said Ashish Thadhani, an analyst with Brean Murray.
What's more, a rush of investors pouring money into India -- where all of these companies find the cheap, skilled labor that's their bread and butter -- has pushed up the value of India's currency, the rupee. Since these firms pay many of their workers in rupees, their costs have risen, too, and their profits got pinched.
Another factor sapping strength from the bottom line is a gain in Indian workers' wages -- with the country's economy growing like gangbusters, demand for labor is increasing.
Still, despite valuations richer than a Cadbury cream egg -- with shares of these five companies trading at between 26 and 39 times expected earnings in calendar year 2004 -- most analysts believe the have room to grow.
"There's a lot of headroom to go further -- a lot of efficiencies that can still be created," said Trip Chowdry, an analyst at FTN Midwest Research. "There will be some barriers, but as long as the corporate mandate is to increase profit and reduce cost, the only two solutions are automation and outsourcing -- companies in either one of those [industries] will do well."
--Note: None of the quoted analysts owns any of the mentioned companies' shares and none of their firms has a banking relationship with any of the companies.
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