23 August 2017

IT Sector - Game Over?

Is it game over for the Indian IT sector? The recent developments in Infosys are more related to friction in the top management but they come at a time when the IT industry is probably reeling through its toughest time in recent history. IT companies are out of favour with most investors and fund managers. In this post we will discuss the headwinds that this sector is facing and what opportunities lie in foreseeable future.

i) Growth

The IT industry as a whole has witnessed slowing growth rates over the last 3–5 years. The below table shows a company to company analysis:

The numbers show growth coming to a screeching halt. Most IT companies are expected to zero to mid single digit rate of growth. This is majorly because of changes in technology which Indian IT companies failed to adapt to and protectionist policies in developed markets.

Do you think that the revenue growth rate will pick up over the next 2–3 years? Can any company post 15% per annum and higher rates of growth in terms of revenue?

ii) Falling Margins

Employee costs are the biggest expenditure that IT companies incur. With rising employee costs, visa issues and protectionist policies in developed markets, most IT companies are reeling under the pressure of shrinking margins. The margin woes are here to say for atleast couple of more years.

Which company do you think can sustain current margins without compromising on growth? Or which company can grow without compromising on margins?

Investment opportunities

We believe that a new door of opportunities are opening up and some companies are well poised to benefit from these in the near future. Look out for companies in the IT sector that:
  • Will be able to post 15% p.a. and higher constant currency growth rates
  • Sustain existing margins, if not improve
  • Have developed new avenues of revenue growth in the last 2-3 years
Now, you need to ensure that you don’t over pay what you buy. So keep a check on valuations.

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