Under a Cloud: Outlook for India’s Outsourcers Looks Gloomy – India Real Time – WSJ

Investor fears that growth in India’s outsourcing industry is slowing down appear all but confirmed.

Tata Consultancy Services Ltd., India’s biggest outsourcer by revenue, reported its first results for the fiscal year of 2016 late last week.

The Mumbai-based company met analyst expectations, with a 12.9% rise in its first-quarter net profit. A bigger concern is slowing sales growth, a sign that the company is finding it harder to grow its business. Tata’s revenue grew by 3.5% in the three-months through June, down from 5.5% growth over the same period the previous year.

The slowdown spooked investors: TCS is an industry bellwether.

After the results, Tata’s shares closed down 2% on Friday, below the benchmark S&P BSE Sensex that closed up 0.3%. Competitors Infosys Ltd. and Wipro Ltd. are set to report results next week.

Analysis by The Wall Street Journal of revenue and profit data from India’s top-three outsourcing firms since March 2014 shows that TCS is not alone.

Other Indian firms are also not just struggling to return to the lightning growth they experienced in the ‘90s, they are moving further away from it.

With the exception of the three-month period ending September 2014, when the weakening rupee helped boost their bottom lines, revenue and net income at TCS, Wipro and Infosys has been slowing, data showed.

All three have seen their revenue growth since March 2014 turn south.

So what’s behind the deceleration?

One reason: a change in the way multinationals spend on technology.

In the past two years, many firms have resumed spending on technology after cutting back in the wake of the 2008 financial crisis, say Indian outsourcers.

Clients increasingly want solutions that use new technologies like data analytics software that help them analyze customer data or save on costs associated with procurement and logistics, and Indian outsourcers are not as good at this compared to their global competitors, say technology purchasing managers.

And, instead of employing large technology firms to run their back-end systems, the firms have increasingly signed up for pay-as-you-go services on the cloud—where servers and software are accessed via the Internet rather than on local networks or personal computers.

In the fight to regain ground, TCS is boosting its spending on digital technology, like big data, mobile app development and cloud computing.

On Thursday, for the first time, the company disclosed how much.  TCS said that it earned about $2 billion in revenue from digital technologies in the three months through June. That figure indicated that the Indian company was earning a small but significant part of its revenue from new technologies, including software that helps firms analyze social media or spending patterns for retailers.

In a further shift toward digitizing its business offering,  TCS will also train 100,000 people in digital technologies in the fiscal year 2016.

TCS Chief Executive N. Chandrasekaran said the Indian outsourcing giant would reach its target of earning more than $5 billion from digital technologies in the next four years. Revenue from this segment is growing at double-digits on a quarter-to-quarter basis, he said.

With its $4.08 billion in cash, left after paying huge dividends and industry-beating wage hikes, TCS could reach that target sooner than expected if it buys firms specializing in digital services, analysts say.

via Under a Cloud: Outlook for India’s Outsourcers Looks Gloomy – India Real Time – WSJ.

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