That is true. There is small cyclical element in IT demand but Gartner predicts decent demand growth from next year. So 2015-16 were worst years.
What Gartner does not talk about is the exponential increase in the number of players, including the small niche start ups for cloud, IoT, Blockchain, Security, Mobile etc. So, the terrain is not as easy as it was before.
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I donât track IT companies and never invested in one and maybe never will as I donât understand them much (although may explore product companies). But I FEEL the below.
Indian IT companies always worked on cost arbitrage model and were never innovators. As a result of which they are/might feel a big pinch when their end customers reduce the business.
End customers themselves are reducing IT budgets bigtime and concentrating mostly on necessary/mandatory kind of stuff for e.g. deliveries/programs related to regulatory stuff. Global financial institutions (FIs) (especially European ones) are facing a scenario of reducing margins and closing down non-profitable (and/or business with very thin margins). As these businesses are also accountable to shareholders and therefore to show profits they are reducing their operational costs and IT budgets become easy target in such a scenario. Add to it the additional (and increasing) capital requirements that these global FIs have to provide for (driven by regulatory actions to do the same) in the aftermath of the 2008 financial crisis.
There is competition amongst IT players too as a result of business coming down because of which they are (or might be) outbidding each other to get projects or foothold in clientâs business. This I think will first impact the likes of IBM and Accentureâs of the world if Indian IT companies can carry out the same activities. But in any case margins are falling in the biddings.
Emphasis on moving to other low cost onsite locations - for e.g. in Europe other low cost IT destinations like Dublin and Poland are coming up and in future other low cost locations in Spain and other East European countries might also come up as the clients want to move out of high cost locations like London and only want to support very important and high touch processes from costly locations.
Increase in offshoring. Lot of processes being offshored (resulting in lower margins again) and again captives of these global FIs also expanding in India as in relative terms it is still much cheaper for them to hire a resource in India rather than pay for a vendor resource at onsite.
On the point of Indian IT companies not being innovators - The fintech and technological disruptions like Blockchain etc. have the potential to wipe out entire back office of these global FIs. Lot of automation too going on, on top of these disruptions etc. This will also impact Indian IT companies as if back offices of these global FIs itself are getting wiped out then why would they need Indian IT companies for support or they will need much lesser number of resources.
Fintech and technology disruptions infact I think may create opportunities for Indian product companies. Lot of global FIs work on many legacy systems. To stay relevant in the current age of disruption these FIs will need to move from these legacy systems to newer products/systems/platforms, which may create better opportunities for product companies.
It is difficult for Indian IT (service oriented) companies to adapt to these changes as they have developed a certain way of working and are kind of too big to adapt. They might go for niche acquisitions in the fintech space or acquire innovators (but again there will be healthy competition for acquisitions here too and MNCs are closer to most of the disruptors/start-ups/niche companies as such companies are mostly in the west; add to it if these disruptors etc. would want to sell out as they already have good access to capital). They will need to adapt to survive and stay relevant which will not be easy.
So lot of headwinds and uncertainty I think for traditional Indian IT companies. Companies that will evolve may come on the right side of this phase.
Just few thoughts that come to mind.
Cheers.
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Hi,
My opinion is it is in a consolidation phase since Management has given a clear indication of margin contraction due to IBM deal which will impact the bottom line.
Key points:-
- Debt free company.
- In very niche IT space not a simple service provider.
- Integration platform and product innovation is a key growth are for the company and already having IPs.
- Stable and established management with the longest experience in this niche area not a start up.
- Have done very good strategic acquisition of Citrix platform to manage cloud mobile application.
- Have good distribution network in place with company like IBM in IoT.
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Indian IT companies may not see heady growth of the past but they are strong and capable companies with smart leaders who can handle disruptions. These are great businesses with excellent corporate governance practices available at reasonable valuations. I think this pessimism about Indian IT sector are speed bumps and provide great opportunity to accumulate if you have long term investing horizon.
Disc - invested hence my views could be biased
Hi All,
I have seen such pessimistic view about IT industry post 2008-09 days, but mostly scenario improved after that. Also we have to keep in mind that, apart from less demand from UK/Europe/US business, rupee has remained steady over past 2-3 years. In 2013, rupee depreciation played major role in lifting profits of IT industry and Mr. Market re-rated those IT companies heavily. So most of the IT stocks were overvalued during 2014 and 2015, which is not the case now.
There could be some downside but it looks that, there is some de-rating which was due for quite some time, and now valuations looks reasonable or attractive in some cases.
As far as Persistent is considered, due to IBM deal, OPM will suffer over next 2-3 quarters, which is natural since some staff at on-site would increase, but eventually as stated by Management, OPM should improve by 2-3%.
These are my views about IT and Persistent.
Disclosure: Invested.
Article on Persistent - http://forbesindia.com/article/boardroom/with-an-eye-on-the-cloud-persistent-systems-continues-to-innovate/44343/0
Persistent results out http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/9F8EF722_F0DC_41FF_AFED_5EA2A6F05EBB_181202.pdf
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IBM will tie up with other providers for Watson
As per interview,âTime and Materialâ business model (effort based) of all IT companies is changing and getting replaced with âresult basedâ business model. So all It companies are finding it it difficult to predict quarterly revenues.
Hi All,
All businesses face headwinds which IT industry is currently facing and going through.
These same IT companies were trading at P/E multiples of 25 just one year back i.e. during Jan-May 2015 periods and are now trading at much lower valuations.
Many analysts were coming with BUY reports for Tier 2 companies at those valuations, and see where those stocks are today. At that time, they never understood that such valuations would not sustain for ever. On same lines, now many analysts are saying to stay away from IT when those stocks are available at P/E of 11 to 15.
It is clear case of lack of understanding on the part of some analysts.
IT industry is undergoing following changes:
- Clients are moving from effort based costing model to âoutputâ based costing model. Software is sized using some standards and then based on the size, cost is derived. IFPUG / NESMA Function points is mainly used to derive software size and then costs which was not the case till 2010-11.
- Clients are demanding more rapid innovations based on Agile delivery model and most of the Indian IT companies are on par with their foreign counter parts in agile based delivery, so they will sustain their business. There could be some short term pains but long term story is intact.
- Clients are reducing their budgets hence demanding IT companies to provide solutions at lesser cost, hence margins are reducing. But this can not happen infinitely and at some point of time, new normal margins will emerge.
- Cloud, Security, IoT and Mobile based solutions will be in demand and those IT companies which are having this expertise will gain from these technical trends.
Having said this, near term headwinds and pain will remain for few quarters and after that, growth may revert back to double digits.
These are my personal opinions based on vast experience of IT industry and I may go wrong.
Disc: Invested in Persistent.
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Persistent ties up with Dell Boomi
Tax rate
March 2006 - 2%
March 2007 - 3%
March 2008 - 3%
March 2009 - 2%
March 2010 - 8%
Similarly many IT companies have less than 30% tax rate.
Can someone please explain reason?
Not sure but may be due SEZ tax benefits. Will check . Thanks for highlighting
Persistent has a branch in Hinjewadi Pune so it falls in SEZ i think.
This tells something about the future of the industry and persistent is one of the fore runners in these technologies.
Productization of services n commoditization of hardware , thatâs where tech industry in SMAC going n can bet microsoft better days are ahead. Not sure about others. Disc: not a MS employee but heavy user of such products
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Security in financial transactions is an interesting space. Persistent announcement.
âPersistent Systems Granted Development Rights by USAAâ
http://www.bseindia.com/corporates/anndet_new.aspx?newsid=8ef3a10b-f5c1-4978-8cea-de8c41ac8801
IBM and Salesforce coming together may help Persistent systems as they are collaborating with IBM for watsonâŚhttps://www.wsj.com/articles/ibm-salesforce-agree-to-partner-on-artificial-intelligence-1488834910?mod=e2tw
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