The quarterly earnings season for India’s outsourcing firms began with cautious optimism. Tata Consultancy Services Ltd, the country’s largest software exporter, reported better-than-expected net profit growth of 8%. Operating margins, which fell to a seven-year low of 23% in the three months to June, rose by one percentage point as Mumbai-based TCS reduced hiring.
From here, however, things can get tricky. European customers, who often account for a quarter to a third of Indian companies’ sales, are almost certain to cut their technology budgets – at least until the war in Ukraine ends and returns to energy supplies are normal. The more important US market may also fail, as the Federal Reserve slows the economy to curb inflation. Some US companies may still be looking to information technology to cut costs as they prepare for a recession. That means new outsourcing contracts.
For Indian vendors, however, the pandemic era when they were heavily involved in IT is now in the rearview mirror. The programmers they hired easily during the Covid 19 lockout are becoming restless as the global economy picks up because they have no career opportunities. The turnover rate at TCS was over 21% last quarter. These were all temporary problems for an industry that came into its own at the turn of the millennium – the Y2K bug put India on the technology services world map.
Two decades later, India’s publicly traded software exporters generate more than $100 billion in revenue, employ 2 million people, and have a market capitalization of nearly $350 billion. TCS alone is worth more than International Business Machines Corp. But size comes at the price of agility. The outsourcing industry is all about helping global companies reduce friction in their work, and that’s something consulting firms have gotten better at lately.
Indian IT firms, closely managed from their headquarters in Mumbai or Bengaluru, still have a strong labor cost advantage when it comes to large-scale enterprise software. However, demand is shifting from the implementation of SAP SE or Oracle Corp. technologies. in the customers area. Demand for cloud-based workflow automation has led to ServiceNow Inc.’s revenue. which has increased sixfold since 2015, while the revenue of Atlassian Corp. based in San Francisco increased eightfold thanks to Jira, a cloud-based project tracking application.
News Summary:
- Indian tech companies have a bigger problem than the Federal Reserve
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