MUMBAI // Investor confidence in India's US$60 billion (Dh220.37bn) technology sector sank to a new low when the industry bellwether Infosys Technologies declared a much lower than expected quarterly profit last week, raising the spectre of an industry-wide slowdown.
But those concerns seem to have evaporated as Tata Consultancy Services (TCS) and HCL Technologies, India's largest and fourth-largest technology companies, respectively, have since wowed analysts with double-digit gains.
TCS, which is owned by the $70bn Tata Group, yesterday declared a 23 per cent rise in March-quarter net profit, compared with the previous quarter, to 24.02bn rupees (Dh1.98bn), beating market expectations.
The company's robust performance is a sign of its "excellent execution and its constant focus on the customer", said N Chandrasekaran, the chief executive and managing director.
"This [approach] has helped TCS round off a sterling performance with strong growth in the fourth quarter while maintaining margins at historic highs," he added.
These results came after HCL Technologies reported a 33 per cent rise in quarterly profit to 4.68bn rupees on Wednesday, well above the 4.3bn rupees predicted by most market analysts.
The strong performances, analysts say, are a sign of robust growth in the sector as overseas clients boost technology spending in an improving global economy.
The technology and market research company Forrester said this month the US technology market, which makes up the largest client base for Indian tech companies, contributing more than half of their earnings, is expected to expand 8 per cent this year, exceeding the 7.4 per cent it projected earlier in the year.
Such strong growth projections are bound to "allay investor concerns [about a slowdown] in the information technology industry after the big miss at Infosys", Nimish Joshi, an investment analyst at the research firm CLSA Asia Pacific Markets, said in a recent note.
Rohit Anand, a senior analyst at the investment consultancy PINC Research in Mumbai, said the results posted by Infosys were a result of internal "company-specific issues" - primarily, sluggish sales amid low client spending.
Infosys Technologies, India's second-largest technology company, which normally sets the tone for industry performance, kicked off the earnings season this month with a net profit of 16bn rupees for the quarter ending on March 31. Industry analysts expected a net profit exceeding 18bn rupees. The results triggered negative sentiments among investors as the company's stock crashed by about 10 per cent soon after the results were announced.
But Mr Anand expects other technology firms - including Wipro, the country's third-largest software exporter, which is due to declare quarterly results later this month - to outperform Infosys.
However, although HCL and TCS restored overall confidence in the sector, it faces headwinds that could impede growth this year.
"The market is very dynamic right now … but this is not a party-time for sure," said Vineet Nayar, the vice chairman and chief executive of HCL Technologies. "The US economy is in a post-recession phase, some European countries are still struggling with slowdown. The overall IT spending is expected to be flattish this year."
The Associated Chambers of Commerce and Industry of India (Assocham)says the sector is struggling with a high rate of attrition, which peaked at 65 per cent over the past two years, as employees frequently switch jobs for more lucrative pay packages.
In a bid to retain talent, salaries in the field are expected to increase 30 to 40 per cent this year, India's National Association of Software and Services Companies says, eroding the sector's overall cost advantage.
"The growing trend of job switching might prove to be fatal for the survival and growth of India's outsourcing sector," said DS Rawat, Assocham's secretary general. "This could hamper India's rapid ascension in the long run."