Last updated: July 13, 2010 6:18 pm

Infosys profit drop sounds Indian alert

India’s outsourcing sector was bracing for fresh uncertainty and lowered earnings expectations after the debt crisis in Europe and currency fluctuations led to an unexpected drop in quarterly profit at Infosys, the country’s second-largest IT group.

Infosys, a pacesetter in India’s flagship outsourcing industry and the first to issue quarterly results, on Tuesday reported a 2.4 per cent fall in net profit in the first quarter of this fiscal year compared with a year ago as revenue from Europe, which comprised about 20 per cent of Infosys’ business, declined 12 per cent.

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Industry leader Tata Consultancy Services reports on Friday and analysts are expected to lower their forecasts after Infosys’ disappointing results.

“Europe is very important for us,” said S.D. Shibulal, Infosys’ chief operating officer. “We expect that Europe will be eventually about one-third of business in the long run. At the same time, we expect some challenges in the medium term.”

A silver lining came from the US, where business improved more than 15 per cent, helping offset the impact of the decline in European business.

In spite of the caution in Europe, US clients were spending again, Infosys said.

For the fiscal year, Infosys forecast its dollar revenue to increase 19-21 per cent, up from the 16-18 per cent growth projected in April.

Concerns over the weak European economy have spurred fears of a slowdown in the outsourcing industry as ripples from the debt crisis have forced some European companies, particularly in the financial services and consumer goods sectors, to put the brakes on IT spending, according to industry watchers.

“European firms will continue to face budget cuts in 2010 and possibly even beyond,” said Sudin Apte, an IT analyst at Forrester Research. “This volatile economic situation and the associated budget uncertainty will result in possible delays to some offshore projects, or worse, the cancellation of some new initiatives.”

The euro’s slide against the Indian rupee of 12 per cent this year is also expected to crimp revenue at Indian IT companies, whose contracts with continental European clients are primarily in euros.

In addition, staffing challenges and rising wage costs are taking a toll.

Infosys and domestic rivals – Tata Consultancy Services and Wipro, India’s third-biggest IT group – have raised salaries between 10 and 20 per cent since the beginning of the year to retain talent as they rebound from the global financial crisis.

Forrester Research forecasts that worldwide IT spending will grow 9.3 per cent this year from an estimated $1,400bn in 2009, estimating that spending in the US will outpace growth in gross domestic product as companies continue to recover from the recession.

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