Indian Outsourcers Living Large on Demand

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This year's financial performance by India's top IT outsourcing firms will be tough to beat in the face of mounting competitive pressures, but an increasingly huge pool of global demand makes it a good bet they'll continue to outrun their larger rivals in 2006.

The current fiscal year, which ends in March, will mark a milestone for Indian offshore outsourcing firms Infosys(INFY Quote - Cramer on INFY - Stock Picks) and Wipro(WIT Quote - Cramer on WIT - Stock Picks), as their revenue crosses the $2 billion mark.

Those kinds of numbers are being fueled by the growing tendency of global businesses to seek ways to cut costs by farming out many of their basic -- and increasingly, not so basic -- operations.

And in fiscal 2007, the four largest offshore companies traded in the U.S. - Infosys, Wipro, Cognizant(CTSH Quote - Cramer on CTSH - Stock Picks) and Satyam(SAY Quote - Cramer on SAY - Stock Picks) -- are expected to average a 32% jump in sales, according to Baseline. That's on top of an average 43% climb in sales in the last 12 months.

Earnings, meanwhile, are expected to grow an average of 27% in fiscal 2007, on top of a nearly 45% jump in the past 12 months.

That kind of showing isn't lost on investors, who have rewarded Indian firms by sending their shares up an average 21% 2005. But the show isn't over yet.

Record Sales

"Next year is still going to be a good year for the outsourcers," says Rich Parower, portfolio manager of the (SHGTX Quote - Cramer on SHGTX - Stock Picks)Seligman Global Technology Fund , which holds Infosys and Satyam shares. "I don't think this has run its course yet."

The streak will continue in part because Indian firms have just scratched the surface of potential demand. Goldman Sachs estimates suggest that the offshore model has penetrated less than 10% of Global 500 IT budgets for core application maintenance and development work, analyst Julio Quinteros recently wrote.

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