India’s outsourcing sector is bracing for fresh uncertainty and lowered earnings expectations after an unexpected drop in quarterly profit at Infosys, the country’s second-largest IT group.

Infosys, a pacesetter in India’s flagship outsourcing industry and the first to issue quarterly results, on Tuesday reported a 2.4 per cent fall in net profit in the first quarter of this fiscal year compared with a year ago. Revenue from Europe, which comprised about 20 per cent of Infosys’s business, declined 12 per cent.

Europe is very important for us,” said S.D. Shibulal, Infosys chief operating officer. “We expect that Europe will be eventually about one-third of business in the long run. At the same time, we expect some challenges in the medium term.”

A silver lining came from the US, where business improved more than 15 per cent, helping offset the European impact. In spite of the caution in Europe, US clients were spending again, Infosys said.

For the fiscal year, Infosys forecast dollar revenue to increase 19-21 per cent, up from the 16-18 per cent growth projected in April.

Concerns over the weak European economy have spurred fears of a slowdown in the outsourcing industry as ripples from the debt crisis have forced some European companies, particularly in the financial services and consumer goods sectors, to put the brakes on IT spending, according to industry watchers.

“European firms will continue to face budget cuts in 2010 and possibly even beyond,” said Sudin Apte, an IT analyst at Forrester Research. “This volatile economic situation and the associated budget uncertainty will result in possible delays to some offshore projects, or worse, the cancellation of some new initiatives.”

The euro’s slide against the Indian rupee of 12 per cent so far this year is also expected to crimp revenue at Indian IT companies, whose contracts with continental European clients are primarily in euros.

“The volatile currency environment is a concern for the industry,” said V. Balakrishnan, chief financial officer at Infosys.

In addition, staffing challenges and rising wage costs are taking a toll. Infosys and big domestic rivals – Tata Consultancy Services and Wipro, India’s third-biggest IT group – have raised salaries by 10-20 per cent since the beginning of the year to retain talent as they rebound from the global financial crisis.

Forrester Research expects worldwide IT spending to increase by 9.3 per cent this year from an estimated $1,400bn in 2009, projecting that spending in the US will outpace growth in gross domestic product as companies continue to recover from last year’s recession.

“While the global economic environment remains uncertain, we continue to see greater demand for services from our clients,” said S. Gopalakrishnan, Infosys chief executive. “The challenge for the industry is to enhance the investment to grow the business, given the uncertainty in the environment.”

Industry leader Tata Consultancy Services reports on Friday. Analysts are expected to lower their forecasts in the wake of Infosys’ disappointing results.

Source:http://www.ft.com/cms/s/2/45900320-8e56-11df-964e-00144feab49a.html?ftcamp=rss