Infosys and competitor Wipro Ltd. (NYSE: WIT) are two of India’s largest business outsources. The two companies compete with IBM Corp. (NYSE: IBM), Computer Sciences Corp. (NYSE: CSC), Cognizant Technology Solutions Corp. (NASDAQ: CTSH), and Accenture plc (NYSE: ACN).

Business and government spending in the US and elsewhere is expected to grow as companies invest in new equipment and outsourcing for their IT needs. Even Europe is expected to grow if very slowly.

Those estimates, though, may seem to fly in the face of reality. But Infosys, Wipro, Cognizant, and India’s largest outsourcer, privately-held Tata Consultancy Services, could reduce a company’s IT costs significantly by replacing highly paid fired workers with lower paid, outsourced workers.

Goldman Sachs Group Inc. (NYSE: GS), an Infosys client, plans to fire more than thousand employees to meet its cost reduction goals of $1.45 billion. That’s bad news for the terminated employees, but might offer some good news for Infosys — and Goldman for that matter.

Of course, the big question for the India-based outsourcers is how much of growth they can expect to see between now and the end of the year. Infosys got 6.2% quarterly growth in the Americas during the quarter and expects growth to continue. The other issue they face is whether or not they can control costs. Infosys expects wages to eat away about 1% of the company’s operating margin this year.

Growth that depends on a depreciating currency in a weak economic climate is tenuous at best. There are a lot of things that can go wrong and put a serious crimp in growth forecasts.

But all is well today. Just past noon today, Infosys shares are up more than 8%, at $56.88, in a 52-week range of $46.12-$77.92. Wipro shares are up about 3.5%, at $9.77, in a 52-week range of $8.63-$16.81. Cognizant shares are up nearly 6.5%, at $71.82, in a 52-week range of $53.54-$83.48.

Paul Ausick

We would also be watching these two:

• Wipro Limited (NYSE: WIT) with a $36 billion market cap in the same space of IT-outsourcing in India. Wipro is indicated down around $14.20 on no volume as of yet versus a close of $15.85 yesterday and versus a 52-week trading range of $11.30 to $16.81.
• Cognizant Technology Solutions Corp. (NASDAQ: CTSH) is technically US-based but has many employees for the same sort of work outside of the United States (including India and many other countries).  Volume is thin, but Cognizant shares are indicated at just under $79.00 versus an $80.78 close on Thursday and versus a 52-week trading range of $45.85 to $82.86.

The IT-outsourcing outfit reported that its fiscal fourth-quarter earnings translated to $0.70 EPS per ADR after revenues grew about 23% to $1.6 billion.  Thomson Reuters had estimates of $0.70 EPS and $1.63 billion in revenues.

The company also issued some mixed guidance for the first fiscal quarter.  It now sees earnings at $0.62 to $0.63 on implied revenues of about $1.64 to $1.66 billion.  Where the problem arises is that Thomson Reuters is calling for estimates of $0.69 EPS and $1.65 billion in revenues. 

For Fiscal-2012, earnings guidance is $2.83 to $2.88 in earnings per ADR and revenues are being forecast at $7.13 to $7.25 billion in revenues.  Thomson Reuters has consensus estimates of $3.10 EPS per ADR and $7.25 billion.  The company’s stance is that it expects the demand environment for its IT services “to be normal this year” in its sector.  Normal?  In short, the company is not seeing a jump up in business and it is asking you to trust what is obviously a back-end loaded year.  Even if the summer months are traditionally not robust in IT, software, and hardware spending, asking investors to be patient and to trust guidance seems a bit much when you consider the markets.

Infosys continues to add to its headcount, with a gross employee additions of 8.930 in the quarter to a whopping 130,820 employees.  The company ended its quarter and fiscal year with right at $3.8 billion in cash and cash equivalents versus what was a $41.7 billion market cap as of yesterday’s close. 

There are two key departures from the Infosys board of directors that investors will want to consider.  Mr. K. Dinesh is co-founder and he is leaving after the annual meeting; Mr. T. V. Mohandas Pai is also leaving after the annual general meeting in June.

Infosys shares at 8:00 AM EST are indicated down around $67.00 on thin volume in pre-market trading after a $73.01 close yesterday and the 52-week trading range is $53.28 to $77.92.

JON C. OGG

Altera Corp. (NASDAQ: ALTR) Started as Hold at Deutsche Bank.
Ansys Inc. (NASDAQ: ANSS) Cut to Hold at Jefferies.
Applied Signal Technology, Inc. (NASDAQ: APSG) Cut to Neutral at Merriman Curhan Ford.
athenahealth, Inc. (NASDAQ: ATHN) Cut to Hold at Jefferies.
Baidu, Inc. (NASDAQ: BIDU) Target raised to $116 at HSBC.
Citigroup, Inc. (NYSE: C) Added to Goldman Sachs Conviction Buy List.
Hartford Financial Services Group, Inc. (NYSE: HIG) Raised to Neutral at Goldman Sachs.
The Home Depot, Inc. (NYSE: HD) Cut to Market Perform at FBR.
Jetblue Airways Corporation (NASDAQ: JBLU) Raised to Overweight at JPMorgan.
Microsoft Corporation (NASDAQ: MSFT) Cut to Market Perform at FBR.
Principal Financial Group, Inc. (NYSE: PFG) Raised to Buy at Goldman Sachs.
Southwest Airlines Co. (NYSE: LUV) Cut to Neutral at JPMorgan.
Wipro Ltd. (NYSE: WIT) Cut to Neutral at Credit Suisse.
Xilinx Inc. (NASDAQ: XLNX) Started as Buy at Deutsche Bank.

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JON C. OGG

The India-based IT-outsourcing outfit also recognized that giant currency fluctuations are a large concern.  New hires were said to over 7,000.

The first take is that shares have gotten ahead of themselves and that shares are fully valued.  We’ll pass a final judgment later because of a recent run-upin shares.

Infosys closed at $71.01 yesterday and the 52-week range is $45.24 to $71.99; shares are indicated down 2% at $69.60 in early indications.

Wipro Ltd. (NYSE: WIT) is a direct competitor indicated down over 1% and “The U.S Indian Outsourcer” is Cognizant Technology Solutions Corp. (NASDAQ: CTSH) and shares are indicated down only marginally.

JON C. OGG

American Water Works (NYSE: AWK) Cut to Neutral at HSBC.
BP plc (NYSE: BP) Raised to “A” at Ftich on debt ratng.
Barclays plc (NYSE: BCS) Cut to Market Perform at Bernstein.
Boston Properties (NYSE: BPX) Cut to Hold at Stifel Nicolaus.
BorgWarner (NYSE: BWA) Cut to Neutral at JPMorgan.
Costco Wholesale (NASDAQ: COST) Raised to Buy at Goldman Sachs.
Harman International (NYSE: HAR) Cut to Neutral at JPMorgan.
Hewlett-Packard Co. (NYSE: HPQ) Cut to Neutral at UBS.
Intel Corporation (NASDAQ: INTC) Cut to Neutral at UBS.
Lear Corp. (NYSE: LEA) Cut to Neutral at JPMorgan.
Priceline.com (NASDAQ: PCLN) Started as Market Perform at Morgan Keegan (late Tuesday).
Tenneco (NYSE: TEN) Cut to Neutral at JPMorgan.
Time Warner Inc. (NYSE: TWX) Cut to Hold at Benchmark Capital.
Wipro (NYSE: WIT) Started as Negative at Susquehanna.

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JON C. OGG

The big hit came from Europe, where Infosys gets 20% of its business. European revenue was down 12%. Business in the US jumped 15% in the quarter, helping offset the loss of business in Europe.

Infosys expects Europe to contribute about a third of its revenue in the long-term, but is not expecting much help in the short- to medium-term. The weak economy in Europe has led to a cutback by financial services groups and consumer goods makers in their spending on IT services. Forrester Research expects that trend to continue throughout the rest of the year and “possibly even beyond,” according to the Financial Times.

Because the company’s contracts with its European customers are paid in euros, Infosys is also getting nicked on exchange rates.

Perhaps Infosys’s biggest cause for concern is the difficulty the company (and its Indian competitors) face in hiring and keeping staff. Beginning in the fourth quarter of 2009, Infosys was forced to look outside India to meet its staffing needs. The industry is being forced to pay higher wages as the Indian economy continues its rapid growth, expected to be around 8% this year.

Infosys employed almost 110,000 people at the end of 2009 and was expecting to recruit another 24,000 by the end of March 2010. That growth was primarily expected to come from overseas, swelling from about 5% to 15% in the medium-term.

And all those people, at least the ones in India, will get paid more. Staff salaries at Infosys rose 8% in 2009 and have jumped 10%-20% since the beginning of 2010.

The cost of rising wages in India parallels the rising cost of wages in China, particularly among automakers. The pay rise in India, though, is going to college-educated, English-speaking staff who are being paid more to begin with than the assembly line workers in China’s auto plants. And as wages rise in China and India, foreign staff looks just as good to those countries’ business managers as China and India once-looked to US companies.

In a bit of good news, Infosys did raise its guidance for the fiscal year. The company now expects dollar revenue to increase 19%-21%, up from April’s forecast of 16%-18% growth.

Infosys shares are trading down nearly 7% today on 4X normal volume.

Paul Ausick

Reuters:   Black Friday deals may not signal a retail comeback.

Reuters:   Kraft (NYSE:KFT) is weighing a higher Cadbury bid as competition from Hershey (NYSE:HSY) and Nestle may emerge.

Reuters:   A group of economists raised their estimates for US growth next year.

Reuters:   Microsoft (NASDAQ:MSFT) and News Corp (NASDAQ:NWS) are working on a distribution deal that would take News Corp’s news sites off Google (NASDAQ:GOOG).

Reuters:   A Fed official said the mortgage-related asset purchase program should be extended.

Reuters:   Chieftain Capital may break into two firms.

Reuters:   JPMorgan (NYSE:JPM), Goldman Sachs (NYSE:GS), and Morgan Stanley (NYSE:MS) may outsource some back office operations to India which would bring hundreds of millions of dollars in sales to Wipro (NYSE:WIT), Infsys (NASDAQ:INFY) and Tata Consultancy. More US financial firms may move operations as they pay TARP funds.

Reuters:   Japan is leaning toward buying F-35 fighters from Lockheed Martin (NYSE:LMT).

WSJ:   Investors are backing away from risk as the year ends.

WSJ:   Italy’s Eni will buy oil stake in Uganda.

WSJ:   Reliance Industries made a $12 billion bid to take control of LyondellBasell

WSJ:   Nissan may produce its electric cars in China.

WSJ:   eBay’s (NASDAQ:EBAY) search feature was down on Saturday.

WSJ:   Existing home sales are up but that has not helped the US housing market much.

WSJ:   Banks are playing a dangerous game by using short term debt to fund loans.

WSJ:   Chrysler is offering 10% financing and $5,000 cash back on 2010 models.

WSJ:   Government payments on debt are based on interest rates that are likely to rise and by 2019 debt service could be $700 billion a year.

FT:   Microsoft and News Corp are talking about a web deal to counter Google News.

FT:   Coca-Cola (NYSE:KO) will work to triple sales in China within a decade.

Bloomberg:   The dollar may not bottom until next year.

Douglas A. McIntyre

ETF’s and closed end fund gainers representing India are as follows:

PowerShares India (NYSE: PIN) up 15% at $17.00 at 9:07
WisdomTree India Earnings (NYSE: EPI) up 23% at $17.20 at 9:07
Morgan Stanley India Investment Fund, Inc. (NYSE: IIF) up 17% at $18.85 at 9:07
India Fund, Inc. (NYSE: IFN) up 20% at $25.93 at 9:07
iPath MSCI India Index ETN (NYSE: INP) up 23% at $48.75 at 9:08

The key Indian ADR shares are as follows:

Infosys Technologies Ltd. (NASDAQ: INFY) up 13% at $36.35 at 9:09
ICICI Bank (NYSE: IBN) up 31% at $23.39 at 9:09
Rediff.com India Ltd. (NASDAQ: REDF) up 32% at $3.30 at 9:09
Satyam Computer Services (NYSE: SAY) up 13% at $2.05 at 9:09
Sterlite Industries (NYSE: SLT) up 19% at $10.98 at 9:10
Tata Motors (NYSE: TTM) up 13% at $8.59 at 9:10
Wipro Ltd. (NYSE: WIT) up 9% at $11.65 at 9:10

This election is expected to allow the government to have a greater degree of flexibility to boost economic reform and growth.  The prior communist parties had not been favorable for issues such as insurance, privatizations, and pensions.

JON C. OGG

Cognizant Technology (CTSH) Cut to Underperform at Wachovia.
Infosys Technologies (INFY) Cut to Underperform at Wachovia.
Newmont Mining (NEM) Cut to Neutral at JPMorgan.
Turkcell (TKC) Cut to Neutral at HSBC.
WIPRO (WIT) Cut to Underperform at Wachovia.
Woodward Governor (WGOV) Cut to Neutral at Baird.

JON C. OGG

The company’s Chairman Raju admitted to cooking the books for the lastfew years.  It seems the company had phony profits and a highly inflated balancesheet.  He resigned and another director resigned.  Indian officials areexamining the role of auditors and the role of directors.  This is allon the heels of what was going to be one horrible mismatched merger inrecent weeks.

DSP Merrill Lynch has also withdrawn as the company’s advisor.  Aboutall that can be said on the decency side here is that the company’sboard of directors is still meeting this Saturday.

The last trades early this morning are  under $3.00 pershare.  MarketWatch even put out a headline with the reference of theIndian-Enron.

Interestingly enough, this killed India’s overall stock market morethan it hurt IT-outsourcing competitors.  Infosys Technologies Ltd.(NASDAQ: INFY) is hardly down this morning.  Same goes for Wipro Ltd.(NYSE: WIT).

The Bombay SENSEX fell by 7%.  You might as well expect weakness to be seen in the Powershares India (NYSE: PIN), WisdomTree India Earnings (NYSE: EPI), and the India Fund, Inc. (NYSE: IFN) for additional fallout.

Jon C. Ogg
January 7, 2009