IT Outsourcing Income Altered By Dollar (Strength)? (INFY, SAY, WIT)

There may be an interesting trend in the IT outsourcing game, and one that will seem counter-intuitive if you have witnessed the currency trends and jobs migration trends since 2002.  This isn’t exactly breaking news now that we have seen the U.S. dollar rebound after a six-year pounding. 

Infosys Technologies Ltd. (NASDAQ: INFY) is one of the largest IndianIT outsource operations, said earlier this week that it seessome weaker revenue growth trends and is seeing some project delays.The company also said that dollar gains may hurt its earnings andrevenue reported under U.S. accounting standards.Infosys shares were down about $2.00 to $37.18 yesterday on the sameconcerns. Investors whobuy ADR’s and ADS’s in foreign companies whenthe dollar is strengthening should also be concerned.

Then this morning  Satyam ComputerServices (NYSE: SAY) and Wipro Ltd. (NYSE: WIT) noted how the currency conversions would alsohave an impact in their quarter. While it doesn’t look like there areany guidance changes, this trend could strengthen if the dollar rebound continues.  This was part of the reason that the SENSEX in India fell by more than 2% today. Indian tech stocks fared worse.  Much of the woes and the pressure on the USGreenback do still exist longer-term, but the Euro essentially rallied100% from its lows seen at the start of this decade. 

Next stop, imagine another scenario which would seem odd if youconsider the manufacturing outsourcing to China.  Imagine ahypothetical day where China actually threw in the towel and said itwants to remove the renminbi peg to the dollar entirely.  You wouldalmost certainly see a sudden move up in the value of the renminbi.  Bywhat amount is unknown.  Some economists have forecasted as much as a 25% move almost instantly.  Take that one stepfurther and all of a sudden all of that cheap labor and outsourcedfactory renting that has been going on would cost that much more toofor all the local currency expenses.  Maybe Michigan and Ohiomanufacturing could actually stage a comeback after a couple decades of erosion.

Jon C. Ogg
September 12, 2008