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Where's IT Headed ?

| 5/2/2013 9:00 PM Thursday

The IT industry is on the cusp of a defining change, with software products and platforms about to take off in a big way, says Krishnakumar Natarajan, Chairman, NASSCOM. Untapped geographies along with emerging technologies are likely to help it along on this growth trajectory. Sagar Lele tells us how the evolving face of technology will make a big difference in the coming years.

The Indian IT industry has been one of the major growth drivers for the Indian economy in the last 20 years, with revenues growing from USD 100 million in 1992 to USD 108 billion in 2012. In this process, garage start-ups became multi-nationals earning billions, India became the offshoring hub with a share of 52 per cent in 2012 in the global offshoring market and domestic companies developed the muscle to battle the likes of Accenture and IBM. Over the years, the industry has grown so big that in FY12, revenues from the sector as a proportion of the national GDP touched an estimated 7.5 per cent. The industry’s share of the total Indian exports came to about 25 per cent in FY12.

In the last five years, the BSE IT index has consistently performed better than the Sensex. Gains on the IT index have always been higher and losses have been lower than those on the Sensex. But lately, the industry has been facing tremendous pressure from global macroeconomic trends. Enterprises have been cutting their technology spend, the environment has not been conducive for ramp-ups and decision-making has been delayed. Moreover, the rupee has been tremendously volatile, causing higher fluctuation in the performance of the Indian IT firms.

There has been a noticeable slowdown in the traditional services provided by IT firms. Demand and pricing have been under pressure, companies have been slowing down in terms of growth and more importantly, their outlook has turned cautious. Agreed that macroeconomic trends have been largely responsible for this, but there is a lot more going on in the industry. Secular changes have been taking place in companies’ offerings, the way they operate and how they deliver. These emerging trends have been forcing companies to restructure the way they function.

Surely, the industry has been going through a process of transition. Now, we have two ways of looking at this. Either we thrash down companies based on our traditional understanding of the dynamics of the sector by terming the so-called underperformers as major laggards, or we look at the opportunity that lies in their strategy  and invest in it to make the most of the next big wave.

Drawing from the latter conclusion (which we think is the way to go), we feel that this not the time to go short on the IT sector by reading too much into the slowdown in traditional serv- ices, but rather to go long based on the potential that the revamped strategies hold out. In accordance with this, we have selected companies that seem to have prospects of delivering value for their customers and eventually for investors in the long-term.

 

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