From:	Baroni Limited [Baroni-Limited@tiscali.it]
Sent:	11 March 2009 13:34
Subject:	Baroni Limited - Offshoring Newsletter' - 05/2009

Is steep rupee depreciation worrisome?
The depreciation of the rupee during the past few days, which has seen the currency reach new depths, has come at a time when the markets are giving mixed signals. Last week, the rupee fell below the 52-mark against dollar before recovering to 51.55. On the one hand, the trade data for January 2009 released earlier this week shows that the trade balance has narrowed for the fifth straight month, even as the decline in exports remains a cause for concern.
The stock market reacted nervously to the rupee plunge, with benchmark indices tumbling over 2% during the day. The falling rupee would deter foreign funds from investing in stocks, especially when the outlook on equities is bearish. Assume that a Foreign Institutional Investor (FII) buys a share for Rs 50 when the rupee trades at 50 to the dollar. If the rupee weakens to 52 and the stock price remains unchanged, the FII portfolio will be worth less than a dollar.
FIIs have already net-sold Rs 8,000 crore (c $1.6 billion) this year. This puts further pressure on the weak rupee, prompting existing investors to dump shares and deterring new foreign investors from buying Indian shares. While analysts would argue that the latter phenomenon represents nothing more than a cyclical pattern of FIIs' involvement in the Indian economy , there needs to be a careful monitoring of the assessment made by the fund managers about the Indian economy in the days ahead.
At a broader level, however, the depreciation of the currency brings to the fore several issues. Purists would argue that the currency depreciation should not be a major cause for concern in the short run for it provides an opportunity to the exporters to become more price-competitive.
Most company estimates for the fourth quarter of FY09 peg the rupee at below Rs 50 to the dollar. For instance, in its guidance for the fourth quarter, Infosys Technologies has taken a conversion rate of Rs 48.71, while the rupee has weakened to Rs 49.23 on an average. If it weakens further in March, as it is expected to, the average rupee rate for the quarter will fall even further.
'Internally, our economist had forecast the rupee will go to Rs 54 by the quarter end. Every 1% depreciation in the rupee will result in a 1.5%-2% improvement in EPS, depending on the hedges the company has taken,' said an IT analyst with a foreign brokerage. Market estimates forecast an even lower figure of Rs 56 to the dollar.
'Even if you account for slowdown, IT companies would not have assumed that rupee depreciation will be as much,' said another analyst. Since the second quarter, IT firms are also progressively reducing their hedges. Many firms that had taken hedges for periods of one, two and even three years are bringing them down to a year or lesser. 'This will have a positive impact on the margins but forex losses will continue for some time,' said Harit Shah, IT & telecom analyst with Angel Broking.
IT vendors have also been far more aggressive in trimming their costs in the fourth quarter compared with the third quarter, which should help the bottom-line, along with the depreciation in the rupee. A few mid-size firms such as Hexaware and Mastek have put their non-billable staff on significantly lower salaries. Larger firms like Infosys Technologies, which had so far become more strict with non-performers, have now announced lay-offs for business reasons.
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Attrition rates which were over 10% for the best of firms have now come down to low single digits, indirectly bringing down staff training costs. 'People in the IT sector are not switching jobs anymore. There are very few jobs in the market and it's best to remain wherever you are, especially if it is with one of the top four. Due to this, attrition rates are at an all-time low. This has brought down training costs for IT companies,' said the analyst.
In the given situation sliding of the Rupees would auger well for the Indian industry as it seeks to step up its exports in the global markets that are in the midst of a slump. At the same time, the weakening of the currency would provide an added dose of protection to the domestic enterprises, especially at a time when these enterprises are smarting under the growing threat of imports from some of India's major trading partners.
It should, however, be pointed out that the currency depreciation is detrimental to the interests of India's exporters in the service sector as their export earnings would take a hit. With the economic downturn in the United States showing no signs of abatement, this sector is already under considerable pressure, and therefore, the depreciation of the rupee comes as a double whammy.
But what should worry the policy markers is the fact that currency depreciation would increase the cost of debt servicing. This dimension needs attention particularly since India's external debt, which has been creeping up since 2007, has increased by more than a quarter in the first six months of the current fiscal.	

 	
 Top Stories	
 	
Recession-hit Japan turns to Indian IT cos
Troubled auto-makers Toyota and Nissan are putting out outsourcing deals worth $100-200 million each, while Japanese electronics majors are augmenting their existing contracts as they look for more cost-effective ways to maintain and support their global IT systems. Traditionally, Japanese firms outsource such contracts to companies within the country, and the rest to China and Korea. However, this is set to change in favour of India, according to IT industry experts that ET spoke to.
IT infrastructure outsourcing market to touch $8.6 Billion in 2010
Remote Infrastructure Management Outsourcing (RIMO) market is expected to touch $5.9 billion in 2009 and $8.6 billion in 2010, says the Everest Research Institute.
US may end deferred tax on foreign income
President Barack Obama’s proposed removal of tax incentives for American companies outsourcing jobs could mean that large outsourcing customers such as GE and Citibank might have to pay certain taxes on their income from international markets, making it less attractive for customers to send IT projects to cheaper offshore locations such as India. While there is still no clarity on how such proposals would be structured economist specialising in international taxation, told ET in an interview that the president could make it more difficult for firms to avoid US tax on income earned abroad by keeping it abroad.
Sierra Atlantic Grows IT Outsourcing Operations and Market Share in China
Sierra Atlantic now employs 375 full-time staff in the third largest city in southern China, Guangzhou. The growth is the result of expanded offshore product development services in Chinese, North American and European markets resulting in several long term strategic partnerships as evidenced by the following customer testimonials
Aviva Signs $1 Billion Data Centre Services Agreement With EDS, an HP Company
EDS, an HP company, and Aviva today announced a 10-year, $1 billion (£700M) data Centre services contract to reduce Aviva’s operational costs, improve information access and increase flexibility. Under the terms of the agreement, which was signed in February 2009, EDS will transform and manage two data Centres for Aviva, the world’s fifth largest insurer. The data Centres, located in Norwich, England, serve Aviva’s businesses in the United Kingdom, India, France and Ireland.
Software Firms Eye Slice of Aerospace Outsourcing
Indian software firms are eying the huge aerospace and defence (A&D) market as airplane makers and Defence companies look to control costs by outsourcing design and management systems. Research firm Frost & Sullivan estimates the Indian Defence market to touch $36 billion by 2013 and companies in India are expected to get offset orders worth nearly $4 billion through 2011.
Superpartners Awards ERP Contract to CSC, SAP
Superpartners, the largest retirement fund administrator in Australia, has selected SAP and CSC to develop its new enterprise resource planning (ERP) system. The ERP system is a part of the company’s larger US$70M technology overhaul.
McAfee to beef up India headcount, eyes over 40%  growth
Aiming to expand its market share and grow its business in India by 40-50% in the next two years, McAfee Inc plans to beef up its workforce by adding 60-70 personnel this year in the country.
Mindteck to Continue Outsourcing to India
Pankaj Agarwal, Group CEO, Mindteck (India) Ltd, said, 'Mindteck will continue to outsource work to India. IT outsourcing is no more governed by cost arbitrage alone as they were in the early days of offshoring. Today many outsourcing vendors are active business/strategic partners to their customers and engage on risk-sharing models.'	
 	
 Service Provider News	
 	
Philippines Looks Beyond Call Centre for Outsourcing Growth
Government and industry leaders in the Philippines would like to see their country take on more of the IT and business process outsourcing tasks that might otherwise flow to the subcontinent.
Romania becoming Europe’s fastest-growing outsourcing hub
Romania has become a highly attractive sourcing destination for companies looking for business process outsourcing, offshore software engineering and contract manufacturing services, according to market reports.
Indian IT majors sign new deals at a discount
Top Indian tech firms such as TCS, Infosys, Wipro, and HCL are signing new outsourcing contracts at 15-20% lower billing rates than last year, as customers including BT, Bank of America and Citibank renegotiate existing contracts and award new projects at much lower rates.
Outsourcing helps Serco buck the trend
Serco will prosper in a deteriorating economy through increased outsourcing of essential services, Christopher Hyman, chief executive, said as it reported an 18% increase in profits for 2008. The difficulties faced by the wider economy were not necessarily a disadvantage for Serco, Mr Hyman said. The 'flexible new deal' - a government programme to assist the long-term unemployed back into the labour market - would be a key area of outsourcing opportunity, he said.
TCS Signs Multi-Year SCM Deal with Infineon
Tata Consultancy Services has entered into a multi-year contract with Infineon Technologies, a semiconductor manufacturer, to operate and maintain solutions within Infineon's Supply Chain Management operations
Logica benefits from clients' drive to cut costs
Strong orders in the final three months of last year helped Logica, the IT outsourcing specialist, to beat profit expectations, as the financial crisis forced European companies to outsource more business. Andy Green, chief executive, said the group's order pipeline had increased 50% since August, as its customers considered shifting business processes to Logica's cheaper offshore locations such as India and Morocco.
Headstrong to raise India headcount
The services firm employs some 3,100 employees worldwide, of which 1,600 are in India, 700 in the Philippines and rest in the US. In spite of feeling the impact of the current economic crisis, the company has been signing large deals.	

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