Some 30 years ago, some tech-savvy people in India surprised the business world. They set up back offices for western multinational corporations. And so, the Indian IT industry came about. Today, it remains one of the most exciting business stories in the country. So far, it has managed to stay relatively unshackled by government intervention and control. And in that, it symbolizes the new India. Independent, self-confident and ambitious…

India’s IT Industry

India’s information, technology and outsourcing industry makes good money. Generating annual revenues of over $60 billion, it has largely driven the country’s economic ascent.

It has grown remarkably well too. Take Infosys Technologies ADR (Nasdaq:INFY), which increased earnings at an average 60% per year from 1996 to 2004. Then, from 2005 onward, it still locked in growth of 36%.

And even though the industry gets most of its revenue from the U.S, Canada and Europe, it has stayed strong throughout the economic downturn. If anything, it became more efficient, tailoring services to help their clients survive the recession.

As a result, Indian IT companies’ first quarter results look impressive.

The country’s largest outsourcing company, Tata Consultancy Services, beat forecasts. So did Wipro Technologies ADR (NYSE: WIT), the third largest. And surprisingly enough, much of their success came from the U.S.

Infosys, which ranks number two, did report a small drop in net income due to currency movements. But revenues picked up strongly and the company lifted its growth forecast to 20% from its April projection of 17%.

That surprised Wall Street, which expected the European debt crisis and a strengthening rupee to hurt the entire sector. Yet despite all that, investors still pocketed total returns of 60% – 100% from Tata, Wipro and Infosys.

Global IT Industry Spending on the Rise

Forrester Research reports that global IT spending is expected to grow 9.3 per cent this year from an estimated $1.4 trillion in 2009. Much of that should come from a rebounding financial services industry, IT outsourcer’s most valuable clients.

And emerging markets should play their part too. Along with other global entities, Indian IT companies want to expand ties in Asia, Latin America and the Middle East.

They have good reason for that too. Just take Wipro, which expects most of its forecasted $1.25 billion revenues in the next quarter to come from the Gulf region.

Similarly, seven years ago, Tata Consultancy took revenues of $100 million from emerging markets. Today, it makes $1.2 billion from them.

In the long term, those areas are expected to contribute about 20% of its overall revenues.

Tata particularly likes Latin America, where it has seven service centers. Its revenues from the region are well over $300 million. And it believes the region can easily become a $1 billion market in the medium term.

As Rising Costs Take Their Toll…

Of course, there’s always a bearish argument for every high-flying investment. And rising costs have taken their toll already on India’s IT companies.

For instance, in the past six months, Tata, Wipro and Infosys each had to increase pay by 10% – 20%.

Tata has already projected spending $200 million on salary raises in the next fiscal year. It suffered an employee attrition rate of 13.1% despite offering higher wages during the last quarter.

Infosys, on the other hand, has offered the highest salary increases of its top competitors. It hopes the move will keep employees satisfied and loyal.

Those companies have good reason to continue doing just that. Many technology sector insiders estimate that costs related to poached employees hit a record $2 billion in the past six months.

Now that hurts.

Still, they don’t seem too worried for now. In fact, each of them plans to hire more than 35,000 people this year to sustain their double-digit growth.

So while those costs could bite them sometime well down the road, right now, they make excellent investments.

Good investing,

by Tony D’Altorio, Investment U Research

India ETF Options:

iPath MSCI India Index ETN (NYSE:INP)
The investment seeks to track the performance, before fees and expenses, of the MSCI India Total Return Index. The index is a free float-adjusted market capitalization index that is designed to measure the market performance of Indian securities. It is currently comprised of the top 68 companies by market capitalization listed on the Nation Stock Exchange of India.

WisdomTree India Earnings (NYSE:EPI)
The investment seeks to track the price and yield performance, before fees and expenses, of the Wisdom Tree India Earnings index. The fund employs a “passive management” – or indexing – investment approach designed to track the performance of the WisdomTree India Earnings Index. It attempts to invest all, or substantially all, of its assets in the stocks that make up the Index. The fund normally invests at least 80% of net assets, plus the amount of any borrowings for investment purposes, in the types of securities suggested by the name.

PowerShares India Portfolio (NYSE:PIN)
The investment seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Indus India index. The fund normally invests substantially all of the assets in a wholly-owned subsidiary in Mauritius. It will normally invest at least 90% of total assets in securities that comprise the index and ADRs based on the securities in the index.

iShares S&P India Nifty 50 Index (NYSE:INDY)
The investment seeks results that correspond generally to the price and yield performance, before fees and expenses, of the S&P CNX Nifty 50 Index. The fund invests at least 80% of the total assets in securities that comprise the index and depositary receipts representing securities of the index. The index measures the equity performance of the top 50 companies by market capitalization that trade on the Indian market.

EGA Emerging Global Shares Dow (NYSE:SCIN)
The Indxx India Small Cap Index is a 75 stock free float adjusted market capitalization index designed to measure the market performance of equities in the small cap sector of India. The index consists of common stocks that are listed on National Stock Exchange and Bombay Stock Exchange.

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