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TCS, Infosys Broadening Geographic Reach

Posted on Tuesday, Apr 26th 2011

According to a market report released by the Everest Group, the global outsourcing market grew at a compounded rate of 6% from 2008 to 2010. IT outsourcing (ITO) transaction volumes grew at an annualized rate of 5% during the period, while business process outsourcing (BPO) transactions increased 12% during the same period. The market recovery was led by the banking, financial services, and insurance sectors and by North America.

The report also discussed major delivery trends and noted that Asia continued to lead offshore activity with 39 new delivery centers set up in India last year. Eastern European cities saw 32 new centers, followed by 27 in Latin America, 25 in the Philippines, 16 in China, and six in Africa. The trend seems set to continue through this year with leading Indian IT players setting up new centers in Asia and expanding hiring in emerging regions. All this is consistent with our forecasts in the Top 10 Outsourcing Trends post that the outsourcing destinations will broaden greatly this decade.

TCS’s Financials
Q4 Revenues at India’s largest IT outsourcer, Tata Consultancy Services (NSE:TCS) grew 33% over the year to $2.2 billion. Net income rose 23% over the year to $542 million. The company’s annual revenues rose 29% to $8.2 billion, and earnings grew 31% to $1.9 billion.

TCS’s Operating Metrics
During the quarter, TCS added 11,700 net employees, ending the year with more than 198,610 employees. The utilization rate excluding trainees fell from 83.8% last quarter to 82.4%. For the quarter, utilization including trainees fell from 77.1% last quarter to 75.1%. Attrition for the quarter remained flat at 14.4%.

TCS’s Global Expansion
Like other Indian IT outsourcers, TCS is plagued by rising wage costs in India. The company expects to see wages in India increase 12% to 14% during the current year compared with 2% to 4% growth in wages in major overseas markets. To control the impact of these rising costs, and to leverage the benefits of near shore outsourcing, the company is planning to ramp up hiring in Latin America and the U.S. As of last quarter-end, TCS reported that nearly 7% of its population was based outside India. Thirty-nine percent of this group was based out of Latin and South American nations including Mexico, Brazil, Uruguay, Ecuador, and Chile. The U.S. accounted for 13.6% of Tata’s international workforce. Yesterday, TCS also announced their plans of expanding in Germany and Japan. The company is looking to acquire companies in the healthcare sector in these regions.

TCS’s stock is trading at Rs 1,192.10 (~$26.60) after having touched a 52-week high of Rs 1,246.95 (~$27.83) earlier this month.

Infosys’s Financials
Q4 revenues at Infosys (NASDAQ:INFY), the second-largest player, increased 23.6% to $1.6 billion compared with the Street’s expectations of revenues of $1.63 billion. EPS of $0.70 was in line with market expectations.

For the current quarter, Infosys projects revenues of $1.64 billion to $1.66 billion compared with the market’s estimates of $1.65 billion. EPS of $0.62 to $0.63 was significantly short of market expectations of $0.69. For the year, Infosys projects revenues of $7.13 billion to $7.25 billion compared with the Street’s estimates of $7.23 billion. EPS of $2.83 to $2.88 fell short of the market’s projections of $3.09.

Infosys’s Operating Metrics
During the quarter, the company added more than 3,040 employees to end its fiscal year with 130,820 employees globally. Utilization rates continued to decline, and the metric including trainees fell to 68.4% compared with 72.6% a quarter ago. Infosys expects its utilization rate to continue to drop in the current year as it adds more than 45,000 employees during the year.

Attrition for the quarter was marginally better at 17% compared with 17.5% reported a quarter ago. However, it is still significantly higher than the previous year’s 13.4%.

Infosys announced plans to expand operations in Thiruvananthapuram, Kerala, to accommodate another 1,600 employees in the facility. Earlier last year, it expanded delivery in China.

Infosys’s Rising Costs
Infosys has been troubled with margin pressure attributed to rising costs. While the pricing of services increased 2.5% during the last quarter, in the coming year, the company expects pricing to remain flat. However, costs are continuing to mount. During the year, Infosys is projecting wage cost increases of 10% to 12% in India. Wage costs for on-site resources are expected to grow 2% to 3% over the year.

The stock is trading at $65.04, taking the market capitalization to $37.2 billion. It touched a 52-week high of $77.92 earlier this year.

A report by Forrester released earlier this month forecast the U.S. technology market to expand 8% in 2011, compared with 7.4% projected earlier. Indian IT outsourcers will be pleased with the higher projections. However, the rising costs are taking their toll on margins. India’s advantage of labor arbitrage is long gone and players have had to look to international locations to expand their operations and provide cost-effective solutions to their clients. As of now, both TCS and Infosys seem to be doing a good job in successfully expanding operations in the Chinese and Latin American markets, as well as second and third tier Indian cities.

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