IT Sector Investment Outlook

Introduction

Financial performance of the Indian IT companies remained a mixed bag during FY16. Mixed opinion about future of these IT companies’ stocks have now started emerging from various research entities. Most of the opinion voiced claim IT stocks to remain stable during the current year while a few believe these stocks may witness a downward trend during the period under consideration. Though, there are various reasons for a cautious road for the Indian IT sector’s financial look out, government policies and economic growth agendas on Digital India and Make in India would help IT industry in near term, we believe.   

Indian IT industry has around 9.5 per cent,a relatively highest key contribution towards nation’s GDP.The sector has witnessed about 17 per cent of the total foreign inflows, according to the statistics shared by the Department of Industrial Policy and Promotion (DIPP). There has been traction in start-up investments which includes USD 5 billion and crossing more than USD 7 billion.The IT/BMP industry accounted nearly 13 per cent growth to USD 146 billion engaging nearly 3.5 million people with 10 million plus indirect jobs. This is the reason government emphasised on leveraging IT to transform India.

According to Indian Brand Equity Foundation, the IT sector by now has proved its capabilities in delivering both on-shore and off-shore services to global clients. Social, Mobility, Analytics and Cloud (SMAC) together is expected to offer a USD 1 trillion opportunity. Cloud represents the largest opportunity under SMAC, increasing at a CAGR of approximately 30 per cent to around USD 650-700 billion by 2020. The second most profitable segment for IT firms is the social media offering a USD 250 billion market opportunity by 2020. Thirdly Indian e-commerce segment is USD 12 billion has strong growth and thereby offers another striking avenue.
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Industry’s financial outlook in FY17

The IT sector’s latest march quarter results remained typically soft due to furloughs at client sites, fewer working days and also due to the fact that clients typically focus more on finalising budgets for the next year. According to Gartner study, global technology spending is expected to grow marginally by 0.6 per cent to USD 3.54 trillion in the year of 2016. However, Nasscom has also raised concerns about slower growth in the sector and pegged software export revenues to grow 10 to 12 per cent in FY17, down from 12 to 14 per cent in FY16. We take a look on how FY17 financially will remain for most of the major companies from IT industry.

Infosys

For Q4FY16, Infosys reported a sequential revenue growth of 1.6 per cent in US dollar terms but the bigger boost came in terms of guidance for FY17. The company has retained forecast revenue growth of 11.8 to 13.8 per cent in actual currency terms for the 2016-17 fiscal year and by 11.5 to 13.5 per cent in constant currency terms.

Infosys is focusing on areas like artificial intelligence, robotics, open source as various newer technologies coming into play. The company also introduced the concept of design thinking led to a new way of doing things by Infosys both internally and also in dealing with the clients. It also introduced other concepts such as zero distance, renew and new which are driving the new growth strategy for the company.

TCS

According to TCS management, the company’s core portfolio performed strongly in a seasonally weak fourth quarter driven by strong volumes led by growth in BFSI, retail and manufacturing sectors. The would give good momentum going into the current financial year. It will also continue to build trusted customer relationships and remain focused on helping them to experience new economy. TCS will continue to invest in developing ‘digital’ talent and launch new products in emerging areas leveraging the Internet of Things, automation and machine learning. The company’s digital remain as a big theme and in FY16, this revenue grew by 52.2 per cent. Its digital revenues were led by analytics & artificial intelligence, cloud and mobility and channels.

Wipro

Wipro witnessed revenue growth of 2.4 per cent in Q4FY16 on sequential basis because of largely contributed from couple of acquisitions in last financial year.The company’s revenue guidance provided for the Q1FY17 in the range of 1 to 3 per cent.However, Wipro has set out very ambitious target for itself to reach a revenue of USD 15 billion by 2020 with an operating margin of 23 per cent. This would mean a doubling of revenues in the next four years.

Wipro has a focus to drive significant growth in business through in integrated services and hyper-automation. The company will gain leadership in the ‘change’ business through investments in digital and consulting capabilities, IP-based platforms & products and creating differentiated domain solutions for non-linear growth.
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Major IT Expenditures:

1.   Employee Benefit Expenses:

India has growing population of young IT and engineering talent. As of now nearly 50 per cent of the total expenses of major IT companies in India are incurred on employee compensation. However, now automation in Indian IT industry has helped companies fetch higher productivity for consecutive 7 years but simultaneously drove down the hiring rates. The requirement of number of employees to generate USD 1 billion has been reduced from 31846 in FY10 to 16055 in FY16.

Here Revenues are said to increase disproportionately to the employees’ cost. Revenues are increasing but employees cost is increasing at a diminishing rate. Where the employees cost has not dropped which also means that higher numbers of employees are being paid lower salaries.

According to Randstad, the HR agency, India remains bullish on the growth of Flexi staffing i.e. temporary staffing hired to work for its Indian IT clients (companies) on contractual basis. This process of placing flexi staff at the top, middle and bottom has been helping IT sector to stand erect irrespective of volatility in the economy

From graphs, we can see that growth in employee cost has tremendously dropped in all the three companies, whereas growth in no of employees has increased for Wipro and Infosys. Moreover, the employee cost to revenue remains more or less consistent.

1.   Research and Development (R&D)

Cloud Computing:

There are almost 24 countries that have adotpted cloud compounding, a service model, which provides shared-processing resources and data to computers and other devices on demand. India ranks 18^th in adoption of cloud computing with its regulatory framework that refrains it from following international standards. This needles the cybercrime and data hacking at higher rate sans a privacy policy. Further bottlenecks are lack of proper bandwidth, consistent power supply and fibre optic infrastructure.

However, the rising use of web based devices by Indians has increased its dependency on cloud computing. Digital India reform by Modi Government for automated delivery of services opens up a plethora of opportunities for Indian IT sector with higher transition of digitization specifically in Indian healthcare and banking sectors. Following Digital India another concept of Smart Cities by Government would encourage higher demand for services from technology companies.

Cloud Spending

According to Gartner, cloud spending is anticipated to surge to USD 2 billion by 2020 which was USD 731 Million in 2015. The leading IT sector listed companies TCS, Infosys and Wipro are the top cloud computing companies in India that have been adopting cloud based services like cloud advisory, development, migration for long. This has drastically brought down the cost and manpower as costly software and hardware systems are no longer required.

Cloud Servicing

With the growing demand for cloud based services, many companies have come up with providing in-house services to reduce the cost of importing. Thereby the public cloud services likely to grow 30.4 per cent to USD 1.26 billion while the IT Infrastructure service is projected to grow 32.5 per cent and PaaS to grow 31.7 per cent during year 2016.

The IT sector has witnessed a transition from legacy IT services to cloud-based services. Cloud services are growing due to organizations pursuing a digital business strategy. Companies would make higher investments in R&D professionals instead of day-to-day technologic operations.

Concerns for Growth in FY17

The IT sector is backing more about stable credit profile because of companies have strong liquidity and low debt profile. However, there may be pressure on profitability margins due to wage inflation, higher visa and subcontracting cost on basis of changing requirements of clients all over the globe. Meanwhile, IT industry’s profitability margins might be protected in current fiscal year by optimising work force utilization levels and weakening rupee against the US dollar.

Considering top line perspective, IT sector may witness an increment its allocation of funds for the new cloud based technologies and digitalization remains lower. IT companies contract size remained low as these projects are in pilot phase. There may be positive headwinds for demand growth from European region due to weaker euro.

The IT industry’s outlook remained sensitive. The cash pile IT sector’s cash drain may happen in current financial year on account of large acquisitions, dividend pay-out or share buyback. This would further lead to increase stress on profitability of the company.

Acquisitions Continue

The Indian IT sector is witnessing a high level of acquisition. There are various companies which are remained in limelight acquiring smaller companies’ business. The inorganic development growth to increase client ticket size as well as number of clients.

Mindtree acquired Bluefin Solutions for GBP 42.3 million and Relational Solutions Inc for USD 10 million in July 2015. The company has also acquired Magnet 360 in Q3FY16. All the acquisitions are aimed at acquiring either new clients or new capabilities, and gaining a foothold in new geographies.

Infosys signed a definitive agreement in October 2015 to acquire Noah Consulting, LLC, a leading provider of advanced information management consulting services for the oil and gas industry. This acquisition was an all-cash deal, with an aggregate purchase consideration of USD 70 million. The acquisition is part of Infosys’ strategy to bring next generation data analytics solutions to the oil and gas industry.

Wipro has signed a definitive agreement to acquire Viteos Group, a business process service provider, for a consideration of USD 130 million in December 2015. The company also acquired Designit as a part of its efforts to enhance its digital capabilities for a consideration of around USD 95 million.
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Dollar and Indian IT:

Conventionally, Indian IT sector performance is directly proportional to the Dollar movement. For Indian equities, where rupee fall is a bane for most sectors, IT sector might gain from it as most of the revenues are earned in Dollars. The biggest USP for India is its IT service which is nearly 3-4 times cheaper than the U.S, thereby encouraging higher outsourcing. Revenues from U.S. grew at a pace of 23.7 per cent to USD 146 Billion in the year of 2015.

Booming economic conditions and Dollar strengthening in U.S. in the wake of large deals enhances IT spending in various verticals of the country, thereby creating more opportunities for the Indian IT industry.However, not every rise in Dollar against Rupee is positive for the IT and vice-versa in the current market scenario. For instance, the seasonal fluctuations in the currencies could show up in muted earnings for Indian IT companies.

Exposure of India to the countries other than U.S. in terms of IT revenues is increasing widely which is currently estimated to be more than 30 per cent. When Dollar strengthens against other currencies like Euros and Pounds, it definitely affects the revenues from those countries to India. Here, we may see an inverse relationship.

Global factors impact on USD

The Chinese central bank devaluated its Chinese Yuan in August 2015. China’s deliberate devaluation of Yuan to attract exports lead to a dramatic rise in US Dollar till the mid of February 2016. However, higher shift of IT projects from India to China, the biggest IT outsourcing peer of India. During December 2015, Interest rate hike in the U.S led to the monetary tightening thereby increasing the value of Dollar. In the recent policy meets both FED and BOJ remained dovish and hence investors squared off their positions pulling Dollar down. Indian IT companies would be impacted only if they have pulled loans from the banks in U.S.

Course of Action for IT companies to tackle USD

The companies tend to hedge its forex exposures through foreign currency derivative instruments that protect them from the foreign currency fluctuations. Most of the companies which use forex forward and option contracts to hedge against the Dollar fluctuation. Few of the companies have their American Depository Shares (ADS), therefore, prices of ADS and dividend are received in terms of USD appreciations.When the companies witness lower gross margin amid depreciation in USD where top line do not grow in line with the costs (majorly the employee compensation cost), it leads to higher attrition rate or lower salary hikes.TCS is leading in increased attrition so far.

Conclusion:

Despite of mixed results from the IT giants and continued pressure in the wake of currency volatility, Indian IT sector is said to grow moderately in the coming years. Outsourcing benefits tend to remain consistent with the prevailing economic stability in the developed countries. The domestic benefits are likely to improve with Narendra Modi government campaigning for ‘Digital India’ that aims for automation in all sectors thereby accelerating IT growth and secondly ‘Skill India’ to ensure capacity utilisation.

No matter what happened to the economy, Indian IT sector has been outperforming for last seven years and would definitely continue to do so in the coming years. 
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IT Sector: Decoding the future outlook

Chirag Gothi and Karan Bhojwani while performing dissections of Indian IT sector, pick up few golden stocks you should have in your portfolio. Meanwhile, they also talk about the big bros of the sector and the road ahead.

Cognizant Technology Solutions Corp has announced its March quarter results recently. The IT giant which has been growing at a top speed for the last numerous years appears to have bungled in the past quarter. It has reported its slowest quarterly revenue growth in 14 years which indicates a slow-down in the IT industry globally. Not only it reported its slowest quarterly revenue growth in 14 years, it has also for the first time in several quarters has failed to outshine growth rate of its Bangalore based arch rival Infosys.

The domestic IT companies posted blended result in the March quarter of 2016.  Infosys reported above-par results and IT bellwether TCS disappointed on growth but it still managed to bear the street for the first time in 7 quarters. However, the past has been steady, but future still remains a mystery for the Information Technology sector. Software industry body, National Association of Software and Services Companies (Nasscom) expects India’s information technology (IT) industry to grow at 12-14 per cent during 2016-17 even as a stormy debate on job outsourcing rages on in the run-up to presidential elections in the US, the biggest market for the USD 108 billion industry. IT sector has been witnessing the challenge of a declining growth rate, with quarter 2016 average growth rate in constant currency (CC) at around two per cent on sequential basis.

“Each industry goes through the life cycle of growth, maturity and decline. IT sector has probably matured over the decades and therefore rapid growth is elusive, which was seen a decade ago, when front line companies use to grow over 100 per cent p.a. Currently the pie for the sector is still growing but at a slower rate of 10-15 per cent. Large companies like TCS, Infosys and Wipro have delivered growth rate in that range.” said Jimeet Modi, CEO of SAMCO Securities.

A crystal ball gazing on IT index using technical perspective:

Weekly Timeframe:

-         IT index registered high of 12908.1 on March 5, 2015 and formed a potential ‘Spinning Top’ Candlestick in this pattern. The real body is small despite a wide range of price movement. This pattern indicates indecision about the future direction.

-         After forming a spinning top candle, it entered into a correction phase and market sequence of lower top lower bottom pattern.

-         Since, March 2015 IT index has been trading in falling channel pattern and it did manage to break the channel on the higher side in recent times but it failed to do so.

-         IT index formed a long higher shadow candle at the higher end of the channel suggesting strong supply at the higher levels.

-         Post formation of long higher shadow candle, two back to back negative candlestick patterns were formed on the weekly chart, indicating dominance of the bears.

-         At present, IT index is trading around 50 per cent retracement level of rise from 10075 to 11697 levels. In any case if this support level is breached it’s likely to test levels of 10695 on the downside.

-         RSI a momentum indicator for the last one year has been trading below 60 mark, this indicates lack of strength in the index.

Daily Timeframe

-         IT Index after registering high of 11697.40 on April 20, 2016 formed a ‘Dark Cloud Cover’ Candlestick pattern; this candlestick pattern indicates bearish movement in the future.

-         Living up to the expectation of the Dark Cloud Cover, IT index started its move on the downside. During this process IT index breached crucial support as defined by its important long term moving average i.e. 200-day EMA.

-         On the daily time frame 10800 is a crucial support, if this support is breached it is likely to head lower up to levels of 10646.

Summing Up:

-         IT Index is likely to trade lacklustre due to lack of some encouraging cues. However, in the short term, 10600-45 is a key support and breach of this support is likely to open gates for a correction up to levels of 10270.

Dark Clouds over Cognizant

The company's net profit rose to USD 441.2 million or 72 cents per share, in the first quarter ended March 31, from USD 382.9 million or 62 cents per share, a year earlier. Revenue grew 10 per cent to USD 3.2 billion, helped by higher demand for its digital services. The company’s largest chunk of its revenue from financial services clients which accounts for more than a third of its total revenue rose 10.7 per cent, while revenue from healthcare services rose 4 per cent.

Based on first quarter results and its visibility on deals ramping up throughout the year, the company has slightly revised down its forecast for 2016 revenue growth, with the management now expecting full-year revenue to be between USD 13.65 billion and USD 14 billion, an increase of 10-13 per cent, as against the earlier guidance of 10-14 per cent. This guidance of at-best 13 per cent growth means Cognizant expects the slowest growth since its inception in 1996, when the US-based firm started serving overseas clients.

Digitisation and automation would be the next drivers of growth

The IT services industry will increasingly replace human capital with software capital. While this evolution is not new, the change has accelerated in recent months with pure IT services firms investing to build IP-based solution accelerators aimed at providing faster time-to-market to their clients (among other things). Investments are also focused on the process automation for development, testing, and maintenance of applications leveraging factory floor concepts. For the IT industry, an autonomics-driven service delivery could ultimately equal a white collar workforce disruption of the kind that robotics brought to the manufacturing industry's blue collar labour force.

Indian companies are investing in automation and industrialisation of services to mitigate the impact of pricing decline built in large deals. Infosys and Wipro indicated elimination of 1,700 and 4,500 roles due to automation. TCS, too, has been doing it for many quarters now. Companies that have identified the changes early and invested in the market are reaping the benefits of it now. Accenture’s good performance of late is also because of early investments in the digital business. Digitisation, internet of things, agile entrepreneurial ecosystem and improving business environment will continue to dominate the industry in 2016.

As per Nasscom report, the share of digital technology investment in cumulative expenditures is expected to rise from 10 per cent in 2014 to 35 per cent in 2020, and 60 per cent in 2025. About 80 per cent of incremental expenditures will be driven by digital technologies. These could be platforms, cloud-based applications, big data analytics, mobile systems, social media, and cyber security, as well as services needed to integrate these technologies.

Infosys vs TCS

Over last eleven years, since TCS' listing, the company has been securing premium over Infosys in two prolonged periods between October 2007 to April 2008 and April 2011 to December 2015 quarter, when the company had delivered much superior results to Infosys.

As the two IT companies compete for investors’’ attention and money, we take a look at how they performed on various parameters in FY16. Infosys’ scorecard was better than that of TCS for a fourth straight quarter. Infosys is the only company in the large cap space which showed acceleration in revenue growth in FY16. We believe strong mining of top clients (top client grew by 19 per cent in FY16), profitable conversion of deals in pipeline and focus on automation, helped the company gain market share. Infosys’ revenue growth of 9.1 per cent in USD terms for FY16 as against 7.1 per cent growth of TCS. Even in constant currency terms, Infosys reported 13.3 per cent growth in FY16 while margins were much more resilient in FY16 than feared by some on the street. TCS' revenue growth failed to surpass its rival company, as it grew at 11.9 per cent in constant currency terms.

Infosys has guided revenue growth of 11.5-13.5 per cent in dollar terms for FY17, implying strong revenue CQGR (Compounded Quarterly Growth Rate) of 3.2-3.9 per cent over the next four quarters. TCS has stopped giving guidance saying they expected strong momentum in BFS, North America and digital to sustain in FY17.

On margin front, TCS expects to maintain its FY17 EBIT margin in 26-28 per cent band. This is despite the headwinds – a) wage hike of 8-12 per cent offshore and 2-6 per cent onsite; b) continued investment in Digital. Whereas Infosys the management expects that to continue in the near term with margin levels expected at 24-25 per cent in FY17.

Jimeet Modi said, “TCS is almost double the size of Infosys in terms of revenues and therefore going forward generating higher and higher growth would be difficult for the company. At the same time Infosys has given revenue guidance in dollar terms at 12-13 per cent which is far more superior when converted into Rupee terms which translates into 17-18 per cent assuming Rupee depreciates by 6 per cent due to global interest rate parity. However such firm guidance was missing from TCS.  Both the companies are currently available at same valuation earnings multiple of 20, therefore it would be more profitable to invest in Infosys than TCS as visibility in growth and margin expansions are more visible and clearly spelt out by the Infosys management.”

Another industry observer, Rahul Jain, VP – Research at Systematix Shares believes TCS has a high probability of matching Infosys’ growth rate and with lower expectations set for TCS in FY17; this may act as a further re-rating trigger, if it happens. He maintains a positive view on both Infosys/TCS but see the risk-reward more favourable in case of TCS.          

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Wipro reports muted earnings but buyback in focus

The country's third-largest IT firm Wipro reported a muted earning in FY16. Its net profit increased 2.7 per cent to Rs 8,892.2 crore in FY16, while revenue grew 9.1 per cent to Rs 51,630.7 crore from last fiscal. In dollar term, it recorded a 3.7 per cent in revenue of USD 7.35 billion for the year ended March 31. Even for the first quarter of FY17, the company has guided for lukewarm dollar revenue growth of 1-3 per cent.

Despite of muted earnings its stock price maintained due to announced buyback up to 4 crore shares for around Rs 2,500 crore. This represents 1.62 per cent of the total paid-up capital at Rs 625 per equity share. After the recent change in dividend tax rules in the Union budget, a buy-back can also result in tax advantages. But if you see from the promoters’ angle, Azim Premzi and his family owns 73.34 per cent shares, so out of the 40 million shares to be bought back, maximum will be bought from the promoters. It’s easy cash out for the promoters.

We expect some of the mid-sized IT service companies to give better return on investment and a decent growth in their revenue and net profit. Here are the selected gems from the IT service industry which are expected to glitter more and these look worthy of parking your money over the next one year.

SQS India BFSI

SQS India BFSI formerly known as "Thinksoft Global Services Ltd." is the leading Business Assurance and Testing Specialist focusing exclusively on the financial sector. Testing market is morphing from manual to automation testing. Test automation is a way to make the testing process extremely efficient. SQS is working on future common automation framework within the group. We believe that while automation would continue to play an important role in a testing process. Currently, 60 per cent of the company’s all deals are managed services deals, which help in better business visibility and improved profitability potential through automation and offshoring. We believe independent testing companies would grow faster than the traditional SI vendors, given their specialised focus on the subject, stronger domain expertise (22 per cent of total workforce for SQSI constitutes of subject matter experts) and lower tolerance on failure of products

On financial front, the company’s consolidated net profit jumped by 70.5 per cent of Rs 36.90 crore in FY16. Its revenue grew by 23.34 per cent at Rs 264.20 crore and operating profit increasing by 50.07 per cent at Rs 53.50 crore along with operating margin expanded by 417 bps for the current period at 20.81 per cent. On the back of benefit the German brand and SQS India BFSI’s domain expertise, incremental migration revenue from the parent and cost competitiveness would make the proposition unmatched compared to several peers.

Technical View: The stock is currently trading at Rs 1159. Its 52-week high/low stands at Rs 1291/ Rs 518 and made on January 8, 2016 and May 7, 2015. The stock after registering high of 1291 in the month of January, 2016 entered into corrective phase. This correction was arrested around levels of Rs 732-734 and post that the stock witnessed a breakout of falling wedge pattern. Since, the breakout of falling wedges pattern, the stock entered into a higher top higher bottom pattern. The stock has been trading above its important long term moving average I.e. its 200-day EMA, which is positive for the stock. The daily RSI is in rising mode and comfortably trading above 60 levels, which confirms the bullishness in the stock. Considering the positive technical scenario, the stock looks a good one to get in as the future remains promising.

KPIT

KPIT, a key IT service provider in manufacturing domain particularly in automotive is all geared up for the next leg of growth. The company is one of a kind in delivering auto electronic services, semiconductor solutions while other service offerings include Enterprise IT.

On financial front, the company’s consolidated net profit jumped 18.78 per cent of Rs 281.50 crore in FY16. Its revenue grew by 7.84 per cent at Rs 3,224.28 crore and operating profit increasing by 34.27per cent at Rs 435.30 crore along with operating margin contracted by 312 bps for the current period at 13.96 per cent. SAP business margins continue to be volatile but could stabilise as maintenance revenue contribution rises.

The company’s management is very confident of maintaining better operating performance for the next year as compared to 13 per cent plus EBITDA for the year, it will be certainly 15 per cent plus EBITDA for FY17 considering the fact that maybe initial first quarter there is always salary increases as well as some visa cost come in, etc but still we are confident of keeping 15 per cent plus.

Technical View: The stock is currently trading at Rs 163. Its 52-week high/low stands at Rs 175.80/ Rs 85.05 and were made on December 15, 2015 and June 25, 2015. The stock has witnessed breakout of consolidation triangle pattern on April 28, 2016. After surging higher, the stock entered into a consolidation phase and re-tested triangle breakout and again moved higher. The daily momentum oscillator RSI is trading above the levels of 60, which is positive for the stock. The stock has been trading above its long term moving average i.e. 200-day EMA, which confirms bullishness for the long term.  Considering the breakout of triangle pattern and stock trading above its long term moving i.e. 200-day EMA we expect the stock to move higher.

Tata Elxsi

Tata Elxsi is a design company that blends technology, creativity and engineering to help customers transform ideas into world-class products and solutions. It’s embedded product design (EPD) (80 per cent of revenue) and industrial designs (11 per cent of revenue) are key growth areas with exposure in industries such as automotive, broadcast, communications and healthcare.

On financial front, the company’s consolidated net profit jumped by 50.45 per cent of Rs 154.81 crore. Its revenue grew by 26.58 per cent at Rs 1,075.21 crore with 90 per cent contributed by volume and 10 per cent by exchange benefits. Operating profit increasing by 39.93 per cent at Rs 247.08 crore along with operating margin expanded by 216 bps for the current period at 22.95 per cent.

The company is focusing more on high margin software development business. Increasing share of software and support services in the business mix should improve revenue composition and margins. Its management highlighted that the deal pipeline for broadcast was currently the strongest in comparison to previous quarters with over- the-top content also gaining momentum. The company is confident of continuing its steady pace of growth. We believe the company to post better growth in topline as well as its bottomline, led by the significant growth in EPD division.

Technical View:

This stock is currently trading at Rs 1860. Its 52-week high/low stands at Rs 2403/ Rs 1045.15 and were made on February 2, 2016 and June 9, 2015. This stock has been one of the best performer stocks in the IT pack for the past couple of years or so. On the daily time frame, it is quite evident that the stock has managed to re-test its crucial support level as defined by 200-day EMA and bounce back sharply to register new high. The Stock’s important long term moving average i.e. its 200-day EMA is in rising mode, which is positive for the stock and indicates momentum is likely to continue in the stock. At present, the stock has been trading around its crucial support zone as defined by horizontal trend line. Considering the support provide by its long term moving average i.e. 200-day EMA, the stock looks promising for medium-long term.
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Transformation is the key to further growth

His association with Infosys lasted for 17 years while he played various roles, being at the helm of financial affairs of the face of Indian IT sector, handling the human resources, administration, research and even headed Infosys Leadership Institute. During his post-Infy days, T V Mohan Das Pai has been active working with various government agencies and regulators. He also remains a member in the Securities and Exchange Board of India (SEBI). A law graduate from Bangalore University, Pai takes time out from his hectic schedule and discusses the possible future scenario of Indian IT sector with Yogesh Supekar. Excerpts:

Q. Since it is the results seasons with Q4 FY 16 earnings being declared and IT companies have come out with mixed bag of results-can you please throw some light on the reason why IT companies in India may be struggling for growth? 

A: All the hardwork put in by Infosys to meet market demand is paying off. It is very clear what we are seeing-last 3 to 4 years Infy has been struggling and whatever they have done to change has come through and that is a good news for the industry. Market has transformed and digitisation has taken deep roots and so IT companies need to change. Nature of spending has changed in the tech market. Project based model is becoming a commodity as the only differentiator in various companies is the price. In that position if you don't transform and you get into digitisation economy, obviously you will become a commodity player and you will be at disadvantage. Also, because of the work done by the Indian IT majors, the quantum of maintenance revenue is not growing, old technology and legacy has been rejuvenated and it implies that things have become much better. Global demand is weak and there is not much compulsion to spend and all this shows that the companies need to transform and I think Infosys has got a new leadership team which is transforming the company and the results are there to be seen. 

Q. Will inorganic growth be the new growth mantra for the big ticket IT companies? 

A:  When the markets do not grow, the fight is for market share and the market is consolidating, let us see.

Q.  Recently IT companies have reduced attrition rate which is likely to reduce gross hiring in the coming year. Would it impact the economy? 

A. So far IT companies have been hiring a lot of people where the nature of jobs was easy. The number of easy jobs is going to be less as the nature of business is changing. IT companies need people with degree of higher skills with a capability of writing codes when they join the company, capability to write app and understand the digital economy. Nature of job has changed and the people who have not learnt to write programming codes in college will be at disadvantage. The total number of jobs may remain unchanged and it may not grow but the total inflow into the markets for  

jobs going to grow rapidly as many more engineering graduates are being produced in India. IT sector contribution will grow but not at same pace as earlier because the base is very high. IT jobs available in the economy is very high. With startups, banks, IT exports companies and rest of the economy, I think there are 500000 jobs created every year all across India. 

Q. How would the government's policies like Digital India, Make in India enhance growth in IT sector?

A: Digital India has many facets. It has to empower every single individual to connect with the web with a smart device. If they connect, lot of things go digital. Education, healthcare, entertainment, e- commerce will be digital.  It will create networks. All things going digital implies that the need for people with digital work capability is going to expand dramatically all across India in next 5 years. It will also create lot of demand for local language portals. In India each state is like a country with 29 states why can’t there be local e -commerce portals. If you want all of the people to come on digital platform you will have to offer them portals and e-commerce in local languages. Why can’t there be a e commerce portal in Hindi, Bengali,Tamil ?  I see a lot of growth in local language e- commerce going forward. I expect explosion of local language e-commerce very soon. 

Q. Which vertical of the IT industry is booming in upcoming term to drive more business?

A:  India IT sector will grow by having new geographies like Japan and Europe.  Digitisation will create a great wave for change. With new apps coming and digitisation happening, the entire tech legacy architecture will have to change thus driving change for many corporations globally and that will lead to visible growth in the sector for coming 3 to 5 years. Remember globally the growth has shifted to offshore companies which are based in India. IBM has not grown the top line for 5 to 6 years. Accenture has more staff in India than in the USA. These companies are in India not because they love India but because the best techies in the world are in India. In the entire tech pyramid, in the bottom 40 % we are clearly at 80 %, in the next 40 % we are about 50%, for the top 20 % we are only at 20 %. For the top 20% we need to be closer to the markets, closer to the innovation and have a deeper understanding of the business. Indian IT sector is expected to gain in the top of the tech pyramid section. It can easily reach to 40 % levels in coming 3 to 5 years. 

Q.  Can you please explain digitalisation in simple terms as ‘digitisation’ keeps making headline and the next big thing and you yourself emphasising on digitalisation for growth?

A. Digitisation is the way of connecting consumers to enterprises. Consumers are right now connected to enterprises through portals. World has changed to app . All the services will be through mobile and apps. The human interface will come down. This is the process of digitalisation. 

Q. Will digitisation impact employment generation?

A. Digitisation threatens white collar jobs. It is a reality. In last 10 years in the USA there has been no increase in salary for middle class. The job for educated middle class suffered and the same thing can happen in India.  In the banking sector for last 10 years, the asset and profits have grown substantially may be 8 to 10 times but the number of people in the industry has grown only by 5 percent. It is being debated in the USA whether new jobs added due to technology are adequate to counter the decline in jobs because of automation.