Indian IT to benefit from uptick in outsourcing demand

Last Updated: Mon, Sep 30, 2013 04:51 hrs

Analysts in India believe that key factors that impact the profitability of Indian software services exporters, namely uptick in demand, a weak rupee and cost controls at home, have come together favourably for the sector. While a large part of this is true, the key growth markets for India's IT exports, US and Europe, are not back to normal. In the first quarter, most players have reported healthy volume growth, but for any earnings upgrade analysts will look for more clarity.

To this extent, quarterly performance of Accenture shows a mixed picture. The company's fourth quarter revenues for the fiscal year 2012-13 declined by 1.5% sequentially to $7.1 billion, but grew 3.7% year-on-year.

Interestingly, new order bookings for the quarter grew at an anemic 1.2% to $8.4 billion. This growth was largely driven by increase in outsourcing orders, which at 4.2% QoQ, while consulting declined by 2.6% QoQ.

What this implies is that the discretionary spending is not seeing any major revival but outsourcing is continuing to grow. In contrast, outsourcing continues to grow, due to the cost efficiencies of most players (including Indian companies) and demand for business process outsourcing. Edelweiss Securities believes that Accenture is facing stiff competition from Indian players, which is why it is struggling. Infosys' pronounced aggression in the market is making things even tougher. The brokerage says: "We continue to believe that Accenture has reaped the benefits of low hanging fruits and increasingly cost is becoming relevant which should benefit Indian IT companies."

Analysts say that Accenture's revenue growth guidance of 2-6% for the FY14 is the lowest in four years. The benefits of low-hanging fruits may be over for Accenture as Indian companies like Infosys getting into the race with aggressive pricing models and cost efficiencies.

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