Challenges Galore for the Indian IT Industry

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The Indian IT industry, which rose to prominence in the last decade, is in the middle of a rough patch; it is experiencing problems that are unique and prolonged and have the potential to disrupt their very business model. IT outsourcing majors like Infosys (NYSE: INFY) and Wipro (NYSE: WIT) are already feeling the heat of it. Although both companies seem to be safe, how much longer will that last.

Tough Times for Infosys

Infosys, which was once considered the Indian IT bellwether, is facing problems that are systemic in nature. The company pioneered and mastered the global delivery model, but found itself on a shaky ground because of prolonged macroeconomic pressures around the world that has resulted in significant reduction in client’s IT budgets. In its hay days the company enjoyed superior profit margins for more than a decade, but clients are now reluctant to give higher margins to Infosys--especially in a time when cost cutting is the top agenda in any firms list now. The company has disappointed the investor community quarter after quarter by reporting numbers that do not augur well with Infosys' history of beating Street expectations.

Road Ahead

The company wants to move up the ladder and concentrate on the consulting stream, an area dominated by a select few. Its recent acquisition of Zurich-based leading global management consultancy firm Lodestone Holding is a significant move in this strategic direction. It has sent a strong signal to the market that it stands by its vision and is not in a game of lowering its margins drastically to beat the competition. Of course, the real challenge lies in its implementation and convincing the world of its capabilities.

Wipro-Caught its breath

WIPRO had seen some disappointing last quarters, but the recent Q2 FY 2013 results have beaten the Street expectations. Many believe that though the challenge is not yet over for the third largest IT services exporter in India, the major organizational restructuring has borne fruits for the company.

CTS is a threat

CTS (NASDAQ: CTSH) is a formidable threat to both Infosys and Wipro if the growth rate of the company is an indication of the future. CTS has given a revenue guidance of 20%, significantly higher than that of Infosys and Wipro and even greater than the overall IT growth rate in India. Any company that expects to beat the industry growth rate seeks investor attention. Acquiring Fresh Business is key growth indicator for a company’s growth, and going by the numbers CTS had overshadowed both Infosys and Wipro in this aspect. The company has earned laurels for its aggressive sales investment, focused footprint, and high quality deal pursuit team.

CTS faces a concentration risk, as a majority of its business is predominantly from the US and any policy change with regards to outsourcing would pose a huge threat to the company. 

Conclusion

With the major economies of the world grappling with the fear of a double dip recession and a cost cutting drive in almost all of the Fortune 500 organizations, IT outsourcing is here to stay, and more and more of business is up for grabs. CTS seems to be a good bet, and even though Infosys had its share of problems its history, management's drive to move up the value chain, and attractive valuations make it an interesting investment opportunity.


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