Is the Worst Over for Indian Outsourcing Firms?

The pall of gloom around India’s outsourcing industry, a $200 billion-plus exporting powerhouse, was lifted overnight by Infosys Ltd. After the company raised its full-year sales forecast, investors took optimistic commentary from management as a sign that large client orders are coming back. The stock, which also trades in New York, surged more than 10%.1 But what if the celebrations are a tad premature?

Both Bengaluru-based Infosys and its larger rival, Tata Consultancy Services Ltd., are facing near-term pressure on profits. TCS reported a 14% decline in net income this week, missing analysts’ estimates. Infosys registered a 2.2% drop. Last quarter’s turbulence can be chalked up to the impact of India’s new labor codes — employers have been forced to bump up gratuity and other compensation liabilities. The more important question on investors’ mind is about the long-term viability of the sector itself.