India's IT leaders try to allay new fears

Worries about Indian IT services companies may be sinking those companies' stocks, but analysts' support and customer wins suggest that the anxiety may be unfounded.

7 min read
Bangalore, India, is as far from Afghanistan as Italy is from Israel and Switzerland is from Chechnya.

That's what Vivek Paul, vice chairman for Indian information technology services company Wipro, has been telling skittish clients over and over again in the month since the Sept. 11 terrorist attacks against the United States.

But his message hasn't helped stop shares of Wipro from sliding right along with those of other top Indian IT services companies.

Apparently fear is the culprit. Investors and analysts have said that fear could take a toll on financial results for companies that outsource Indian programming services for U.S. clients: fear of flying, worries about India's proximity to Pakistan, the ability of Indian workers to get U.S. visas, and cultural misperceptions.

The concerns about Indian IT services companies are quite a change from the attitudes a few months ago.

Infosys, Wipro and Cognizant--the leaders in that sector--were the shining examples of a vaunted business model for an open, global economy. All three companies garner most of their revenue from American customers who choose to outsource their work in India to save money.

The tech slump actually had been helping these Indian IT leaders, which had been faring better than similar companies in the United States, because customers had to outsource more to save money--or so the argument went.

Paul said he first noticed tension among American clients and potential customers in the first few days after the attacks on the World Trade Center and the Pentagon.

"Clearly there's been a knee-jerk reaction across the board," Paul said. "There is an enormous amount of confusion out there."

Shares of Indian IT companies have tumbled on higher-than-usual trading volume.

Shares in Infosys fell from $48 a share before the attack to a low of around $33; they then rebounded to about $43 after the company's quarterly report last week. Wipro fell from $30.76 on Sept. 10 to $21.26 on Oct 10. Cognizant had the most dramatic decline, tumbling from $37.35 Sept. 10 to $21 Oct. 10; its shares now hover around $23.

But Infosys' recent earnings report, new optimism among analysts, and comments from these companies' customers indicate that fears may be unfounded.

"There is obviously a misplaced fear that will probably turn out to be wrong over the longer term," said Banc of America Securities analyst Prakash Parthasarathy.

Keeping customers
Indian IT companies are working to keep perception problems from turning away customers. For example, they are giving customers more attention by flying out to meet them and videoconferencing with them.

So far, the efforts seem to be paying off. The big three Indian IT companies confirmed customers aren't canceling contracts.

"Being proactive has really helped us," said Wipro's Paul. He tells concerned clients that Bangalore--where Wipro is based--is far from Afghanistan, and he encourages employees to be up front in noting this as well. Clients have not canceled plans to meet with the company, but instead of flying out, they're videoconferencing. Wipro is scheduled to report its quarterly results Thursday.

Infosys, which reported a stronger-than-expected quarter, said its business is on track. CEO Narayana Murthy said only one thing has changed for the Bangalore-based company since Sept. 11: "We're traveling more."

Customers are requesting that Infosys fly its executives to them more often, Murthy said. "They have asked us to bring our CEOs to them," he said. "We did it. We went the extra mile for our clients."

Checks with customers indicate that the extra mile is paying off for Indian IT companies, which are landing customers after Sept. 11.

Campus Pipeline, based in Salt Lake City, signed its first contract with Infosys on Oct. 8. It didn't travel to India to check out the facilities, and the events of Sept. 11 were never an issue in its decision.

"We had no hesitation" about becoming a client, said David Murray, the company's chief technology officer. "They're established players."

Murray said that Campus Pipeline, which provides Web integration services for colleges, had researched other Indian IT companies for the past three or four months before making the decision.

Current clients of the Indian companies echoed Campus Pipeline's sentiment of trust and said they didn't need to see the facilities in India--or worry about their safety.

"What do you need to see offsite?" said Thomas Wittman, senior vice president for development at the Philadelphia Stock Exchange, which has been a client of Cognizant's for two years. The exchange has six people at its U.S. office who manage all the outsourcing. "We've never had to go over there," Wittman said. Cognizant, which is based in Teaneck, N.J., does most of its business in Bangalore. It is scheduled to report earnings Tuesday.

Even customers with a more hands-on approach to offshore work still say they aren't changing the pace or volume of their business.

"Sept. 11 has not affected our business," said Patrick Burke, director of global development at Compaq, a long-time customer of Wipro. Compaq has about 175 employees in Wipro's Bangalore offshore center, which the PC maker helped to establish. Burke said employees in the U.S. have been given the option to stop traveling to India, but none have accepted.

Business prospects
Infosys has given heft to theories that U.S. companies will stick with the larger Indian IT players despite the new rash of fears.

"Everyone at Infosys seems to be happy, laughing and smiling," Murthy said on a conference call after the company's quarterly report. Infosys reported that second-quarter net profit rose 31 percent to about 2 billion rupees (about $41.89 million) from a year earlier, topping expectations. The company also raised its earnings estimate for the fiscal year.

Infosys said it signed on 11 of its 28 new customers for the quarter after the Sept. 11 attacks. Customers who used to make trips to India to scout out several clients are now just choosing to go with the more established players, management said on the conference call.

"Because our brand and visibility is high, if an India visit gets canned, we still get the client. They go with us because we're more reliable," Murthy said.

The optimism on Infosys' conference call was a stark contrast to the financial misery many analysts had predicted.

"The Sept. 11 events will prolong already stretched sales cycles of IT services companies, and the perceived geopolitical risk will restrict client visits in the short term," Salomon Smith Barney analyst Rahul Dhruv said in an Oct. 8 research note before Infosys reported earnings.

The analyst, who had predicted accelerating growth for most Indian IT companies before Sept. 11, now sees flat to negative quarter-over-quarter growth. Dhruv also lowered his earnings projections for fiscal 2002 and 2003 by 11 percent to 23 percent.

Gartner analysts Sujay Chohan, Rolf Jester, John Roberts and Rita Terdiman say the U.S.-led attacks in Afghanistan will likely affect India's software industry, if only for a short while, but assessing the risk to vendors located in India is not simple.

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Paul declined to comment on specifics about Wipro's financial performance, citing the company's quiet period ahead of its first-quarter earnings report scheduled for Thursday. He did say that more than 25 percent of the company's new accounts for the quarter started billing after Sept. 11. Wipro is expected to announce earnings of 10 cents a share for its first quarter Thursday, according to First Call.

Cognizant was the second company to report results, topping estimates by a penny with earnings of 30 cents a share in its third quarter. First Call had been expecting earnings of 29 cents a share.

The company also said Tuesday that third-quarter revenue increased to $45.5 million, up 23 percent from $37.1 million in the third quarter of 2000.

The company said that while some smaller clients were scaling back new projects due to the economic environment, its larger clients are still increasing their spending, and there have been no repercussions from Sept. 11.

"It is important to note that despite the current geopolitical tension we are seeing no change in the perception of the strategic importance of the offshore model to large blue-chip clients," said Cognizant CEO Kumar Mahadeva in the company's earnings release.

Outsourcing remains strong
If fears about Sept. 11 and terrorism dissipate, it's likely Indian IT companies will continue to thrive, one study indicates.

Statistics from the National Association of Software and Service Companies, an industry association of IT software and service companies in India, shows that outsourcing is growing at a heady pace despite a slowdown. An Aug. 16 report says IT software and service exports from India grew 52 percent in the first quarter of 2001, as opposed to 65 percent in the first quarter of 2000.

Even Dhruv's lower projections call for growth of 31 percent in 2002 and 23 percent in 2003 for Indian IT companies as a group. Dhruv also noted that frontline players Wipro, Satyam Computer Services and Infosys will be better off than smaller companies.

"Branding and the relationship of companies with their customers plays a big role now," said Banc of America's Parthasarathy, who still projects strong growth for India's IT players.

"The growth rate for Indian IT companies has been 40 to 50 percent over the last nine months, whereas the IT services industry overall has only grown around 5 to 7 percent," he said.