HCL Technologies says US outsourcing market is weak

HCL Technologies, a large Indian outsourcer, said that US customers are buying in the hope that the recession is over, even though the macro-economic indicators in the US are still bad.

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HCL Technologies, a large Indian outsourcer, said that US customers are buying in the hope that the recession is over, even though the macro-economic indicators in the US are still bad.

"I don't know if they will continue to invest", said Vineet Nayar, CEO of the company, during a conference call on Wednesday to discuss the company's results for the quarter ended 30 September.

Infosys Technologies, India's second largest outsourcer, said last week that the business environment continues to be challenging. The continued global economic uncertainty, coupled with extreme currency volatility, is a concern for the industry, it added.

Analysts however expect that the market for Indian outsourcers will continue to be strong. Demand for services in the second half may not be as high as in the first half of this year, but will be certainly higher than last year, said Jimit Arora, research director at Everest Group.

The slowness in growth that is expected in the second half is largely because demand before that was driven by pent-up demand for offshore services, which was postponed during the recession, Arora said. Customers will now move to more careful spending, where every decision on IT spending will be closely scrutinised at various levels in the customer organization, Arora added.

Despite Nayar's uncertainty about the US market, HCL's revenue picked up strongly in the quarter to 30 September. Revenue for the quarter was US$804 million, up 27.6 percent from the same quarter last year. Net profit of $72 million was up 7.9 percent from the previous year.

Revenue from the US was $466 million in the quarter, which was 26 percent higher than in the same quarter last year. US revenue however grew by only 2.8 percent from the previous quarter, in contrast with 18.2 percent growth for revenue from Europe, and 19.8 percent growth for revenue from the rest of the world.

The US, the largest market for Indian outsourcers, accounted for 58 percent of HCL's total revenue.

HCL said it will continue to invest in selling, general and administrative expenses (SG&A) in anticipation of growth in its business. The company's margins took a dip in the quarter to 30 September as it added 5,661 more staff, increased salaries, and added to its "bench" of staff waiting to be deployed on projects. The company wanted the best staff on its rolls before its competitors started hiring, Nayar said.

The company is seeing a strong deal flow, but is keeping its fingers crossed on whether this strong demand will continue, particularly because of uncertainty in the US, Nayar said.

It is too early to take a call on the US market, he said.

Infosys reported revenue of $1.5 billion for the quarter ended 30 September, up by 29.6 percent on the same quarter last year. Profits grew in the quarter by 18 percent to $374 million. The company also raised its revenue forecast for its fiscal year ending March 31, 2011.

HCL's competitors, Tata Consultancy Services and Wipro are scheduled to announce their results this week.

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