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India's outsourcing firms doing just fine

Sales rose by about a sixth at Infosys, one of the top three suppliers in the outsourcing business.

Pawel Kopczynski/Reuters/Pawel Kopczynski/Reuters

While western politicians yabber on about bringing jobs back home, third-quarter results for India's top three IT outsourcers show just how hard it is to reverse the offshoring trend.

At Tata Consultancy, the industry leader by revenue, sales jumped by more than a fifth from a year earlier in dollar terms, it said last week. At Infosys and Wipro they were up by around a sixth. This puts the industry on track for 16-to-18-per-cent growth for the year ending in March.

Such a resilient pace comes from the fact that although the U.S. and Europe support four-fifths of the top three's sales, sector penetration is skewed. While banks were early into outsourcing, retail, manufacturing and health care are yet to catch up. Further behind are emerging nations now grappling with cost pressures. Tata's sales from Asia surged by more than half year-on-year last quarter. New technologies, such as cloud computing, are also helping.

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There are risks, however. One is pressure on India's outsourcers to move up the value curve as their own costs pick up. The top three now employ half a million workers and wages make up 40 per cent of sales. So far, profitability is stable but mostly because costs are in the weakening rupee, while clients are billed in dollars. Excluding a 13-fold currency gain at Wipro, operating margins fell two percentage points over the year in the third quarter.

But India's cost advantage may still save the day. More than 1,000 big outsourcing deals worth about $200-billion (U.S.) are up for renewal in the next five years, Standard Chartered forecasts. Weakness, especially in Europe, could drive some of this business to India. The potential has not been ignored. All three stocks trade at a premium to the Sensex, at 19-to-23 times current earnings. Not the historical highs of 50 times – but enough to suggest outsourcers are doing just fine.

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