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Strong Performances and Several Acquisitions from Indian IT Outsourcers

Posted on Wednesday, Sep 19th 2012

Indian exporters, especially the $100 billion IT outsourcing industry, is worried about the rupee’s exchange rate fluctuations. The rupee was the worst performing currency in Asia in the first half of 2012. However, the currency recently recovered as a reaction to the Indian government’s plans to allow foreign investment in retail and the airline industry. A rising rupee hurts the reported earnings of the IT outsourcing industry, which sees profits fall as costs, when converted to dollars, grow.

TCS’s Financials
Tata Consultancy Services’ (NSE:TCS) Q1 revenues grew 13% over the year to $2.73 billion. Earnings grew 14% over the year to $604 million, ahead of market expectations of $565 million. During the quarter, the company added more than 13,830 employees to end with 243,545 employees. Utilization rates remained high at 81.3% for the quarter.

While TCS does not divulge projections, it is confident of surpassing NASSCOM’s industry growth projection of 11%. TCS expects to report 11%-14% revenue growth this year.

TCS’s Acquisition
Several Indian IT players have been eying acquisitions to expand delivery and market reach. Recently, TCS announced plans to acquire tech startup Computational Research Laboratories (CRL) for Rs 1.88 billion (~$34 million). Pune, India-based CRL designs and builds high performance environments. It is particularly known for its cloud-based, domain-rich industry platforms that are able to cater to the need for high-performance computing applications. TCS hopes to expand its cloud computing offerings through the acquisition.

TCS Expands On-Site Presence
Indian IT outsourcers have also been expanding their local presence in the American markets. The move is expected to help mollify anti-outsourcing sentiment, wherein people feel that the Indian players are siphoning off jobs and contributing to unemployment in the U.S. As part of this initiative, TCS opened a new delivery center in Michigan and is also planning to expand its Cincinnati operations by 40% over the year.

TCS’s stock is trading at Rs 1,342.10 (~$24.87) after having touched a 52-weeek high of Rs 1,439.80 (~$26.68) in April of this year.

Infosys’s Financials
Infosys (NASDAQ:INFY) also had a strong Q1. Revenues grew 4.8% over the year to $1.75 billion. Earnings per American Depositary Share grew 9% to $0.73 and were in line with market expectations. The company added 51 new clients during the quarter and reported a gross addition of more than 9,235 employees. It ended the quarter with 151,151 employees.

Infosys expects to end the current year with revenues growing 5% to $7.34 billion. The market was modeling revenue growth of 7% for the year. Earnings per American Depositary Share for the year are projected to grow at least 1% to $3.03.

Infosys’s Acquisition
Like its competitors, Infosys has also been eying inorganic growth. Earlier this month, it announced plans to buy managing consulting firm Lodestone Holding AG for $349.4 million. The acquisition of Zurich-based Lodestone will help strengthen Infosys’s presence in the European markets. Lodestone has more than 200 clients spread across Europe, Latin America, and Asia Pacific. Lodestone focuses on SAP-based consultancy.

The stock is trading at $57.21, taking the market capitalization to $32.69 billion. It touched a 52-week high of $77.92 earlier this year.

Wipro’s Financials
Like Infosys, Wipro (NYSE:WIT) isn’t counting on a strong outlook. Revenues from the IT services segment grew 8% over the year to $1.52 billion. EBIT for the segment grew 24% over the year to $314 million. During the quarter, the company reported a net addition of 2,632 employees to end the quarter with more than 138,550 employees. It added 37 new clients during the period.

For the current quarter, Wipro expects IT services revenue of $1.52-$1.55 billion, translating to sequential growth of 0.3%-2.3%. The market was looking for a growth of 2%-4% for the quarter.

Wipro has not managed to make an acquisition. However, it has reported strong growth in global contracts. It is expanding in Europe and was selected for a large multiyear contract by Royal Philips Electronics and by a leading retail bank and insurance provider in the UK. Within the Middle East markets, it won a multiyear engagement with Al Hammadi Hospital in the Kingdom of Saudi Arabia to implement technology platform for an upcoming 350-bed hospital in Riyadh. It is also growing its domestic market presence and recently won a multiyear contract to implement MPLS Network for Powergrid, India’s Central Transmission Utility, which is responsible for the complete inter-state power transmission system.

The stock is trading at $8.92, taking the market capitalization to $21.81 billion. It touched a 52-week high of $11.49 in February 2012.

HCL’s Financials
Another outsourcer, HCL Technologies (Bombay Stock Exchange – HCLTECH), seems to be challenging other IT players and the market with its strong growth. HCL saw Q4 revenues grow 12% over the year and 3% over the quarter to $1.08 billion. Net income of $156 million grew an astonishing 36% over the year.

HCL ended the year with revenues growing 17% to $4.15 billion and net income growing 31% to $495 million.

HCL’s Price Cuts
HCL is waging a price war on its competitors. HCL’s CEO, Vineet Nayar, believes that during the current year, $45 billion of orders are up for renewal. The company expects more than 30% of these customers to be looking for newer vendors. HCL plans to tap into the market by making its commercial terms friendlier and more flexible for the customer. It is considering lowering the prices offered for these contracts.

To ensure that the lower prices do not hurt margins, HCL plans to expand its delivery center reach to low-cost locations. Recently, it opened a new delivery center in Manila, the Philippines. Work is expected to move from Singapore to this new facility.

HCL’s stock is trading at Rs 567.25 (~$10.51) after having touched a 52-week high of Rs 595.00 (~$11.02) earlier this quarter.

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