Rebound, technically speaking

Despite the global downturn knocking a hole in demand for its outsourcing services, India's information technology sector is on the way back to growth.

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The Indian giant Infosys Technologies exemplifies the country's struggle against the effects of the global economic downturn - and the resilience of its tech sector.

Last year Infosys declared 12 months of near-zero growth for the first time since it was founded nearly two decades ago.

The ebbing growth of India's second-largest software exporter by sales, long hailed as a bellwether for the country's US$60 billion (Dh220.38bn) information technology (IT) and outsourcing sector, was a stark indicator of the global slowdown, one of the worst since the dotcom crash in 2000.

Tepid demand for outsourcing in recession-racked western markets, rising costs and attrition levels led to rapidly shrinking revenues for Indian IT companies.

That prompted many to scale back hiring and curb the expansion plans drawn up when the sector's growth was surging at 30 per cent.

At the time, Infosys counted among its clients giants such as the Bank of America and Merrill Lynch, companies that were battered by the financial services-led meltdown.

But the days of double-digit growth are returning on the heels of a buoyant demand for technology services.

Global technology spending rose by 3 per cent this year, the research company Gartner says.

On Friday, Infosys reported 27 new clients for the September quarter.

It declared a surprise second-quarter net profit of 17.37bn rupees (Dh1.44bn), up 16.7 per cent from the previous quarter and 13.2 per cent from the same quarter last year.

"Though the economic environment continues to be challenging, we have leveraged our client relationships, solutions and investments to grow faster in this quarter," says S Gopalakrishnan, the chief executive and managing director of Infosys.

Infosys is the first major IT company to declare its second-quarter results. Analysts predict other major companies, including Wipro and Tata Consultancy Services, will also post upbeat results.

But "this is not an era of the new normal for the IT sector", warns Sangeeta Gupta, the vice president of the National Association of Software and Services Companies.

"Yes, growth is back, but it's not the same as the old heydays of 30 per cent growth. We're hitting a lower double-digit growth rate this year."

But Ms Gupta says the slowdown has led many IT companies to reinvent themselves.

She says they used the slowdown to venture beyond their core business in application development and maintenance to higher-value businesses such as research and development outsourcing.

Many entered new markets and diversified their customer base beyond purely IT-related applications to areas such as banking and financial services, manufacturing, retail and telecommunications.

"Post-downturn, IT companies are increasingly adopting a 'do more with less' business model while still turning a profit," Ms Gupta says.

The export-driven sector is also increasingly tapping into the domestic market.

Gartner says India's impressive "economic growth coupled with government-led core infrastructure projects" are opening new opportunities for companies.

The Indian domestic market is valued at $23bn and Gartner projects India's enterprise spending on IT will rise to $40bn by 2013.

"Near-term growth will be driven by companies' need to optimise cost and focus on core business while externalising the management of commodity infrastructure services," says Arup Roy, a senior research analyst with Gartner.

But many small and mid-capitalised IT companies have still not recovered from the effects of the slowdown.

A recent Reuters poll of brokerages estimated profits would drop 3.7 per cent at HCL Technologies in the second quarter, 28.6 per cent at Patni Computer Systems and 44.5 per cent at Mindtree.

At many other companies, a round of pay rises in the June quarter and robust hiring are expected to affect profit margins, analysts say.

The human resources consultancy Manpower India says industry-wide attrition levels have risen by 20 per cent this year.

At Infosys, attrition in the past year has gone up by 15.8 per cent, the highest in the past five years.

And a strong rupee, which is gaining as domestic interest rates climb and foreign investors pump money into the stock market, is crimping profits for this export-driven sector.

Credit Suisse estimates that for every percentage point rise in the rupee against the dollar, earnings at the top three IT companies decline by between 1.2 and 1.5 per cent.

Since early last month the rupee has shown an upward trend, rising by nearly 7 per cent so far.

The IT industry, which generates almost 70 per cent of its revenue from the US, is also concerned about protectionist measures proposed by the Obama administration in recent months.

To try to bring down a persistently high unemployment level of nearly 10 per cent and boost a sluggish economy ahead of congressional elections next month, the US President Barack Obama proposed to end tax breaks for companies that create jobs and profits outside of the US.

Last month, the state of Ohio placed a ban on outsourcing government contracts funded by state money.

And in August, it ordered a steep rise in some categories of H-1B and L-1 visas, which act as work permits for Indian engineers operating in the US, to fund the enhanced security at the US-Mexico border.

The move will cost Indian IT companies an extra $200 million each year, says Anand Sharma, the minister for commerce and industry who describes it as "regressive".

Ms Gupta says the additional cost burden is unlikely to significantly dent profit margins of Indian companies.

"Our main concern is the discrimination," she says.

"For Indian companies to continue in a global market, we need open borders and fair play. The negative impact of protectionism should not defeat the benefits of globalisation."