The Synopsis
"When America sneezes, the world gets a cold," as the saying goes.
Well, it's a term that gives you a sense of the US's worldwide influence— the impacts of globalisation and all that.
However, India has its own version of the quote: "When America sneezes, India develops a cold." India develops a fever when Europe sneezes beside it."
It's also a nice way to characterise the Indian IT sector. Because we owe approximately 70% of our exports to two regions: the United States and Europe. As a result, when these areas experience a slump, Indian IT suffers as well.
When Covid-19 hit last year, for example, IT investors were on pins and needles.
Why?
Because the previous global recession, which occurred in 2008, was not nice to anybody in the business. Before the financial crisis, IT businesses' revenues were increasing at a rate of 30% each year. Soon later, it plummeted to 15%. Companies all throughout the world were forced to slash costs and live on the bare essentials. While the IT industry is mostly recession-proof, there is still some uncertainty when circumstances are rough.
We wouldn't blame you if you tried to draw connections between what occurred in 2008 and what would happen in 2020. Because when worldwide lockdown became a reality, everyone feared the worse. However, because to one important behavioural adjustment — working from home — the pandemic turned out to be a gift in disguise for the industry.
Here's how it's done:
There will be obstacles on the digital front if you want to allow your workers to work remotely. And you'll need someone to help you figure it out.
Then there's the cloud platform migration. Everyone on your team has to be able to access all of the data on the go. According to Tata Consultancy Services (TCS), just 20% of large organisations were using the cloud prior to the pandemic. However, that number has already risen to about 35%.
Then there's the reality that as the world changed around them, many established players doubled down on IT — digital storefronts, digital payments, digital marketing, digital everything.
And it is here that Indian IT businesses saw a huge potential. These individuals hope that everyone in the United States and Europe is interested in digital transformation. According to Gartner, worldwide IT investment rose by barely 2.5 percent each year from 2012 to 20. However, in the following three years, that figure is predicted to rise by more than 9%.
All of this has already resulted in solid revenue growth for India's IT behemoths.
The agreements, too, are becoming larger by the day. Remember how we spoke about "digital transformations" earlier? Companies, on the other hand, are eager to spend money today to ensure that they are future-ready.
Take, for example, Infosys. Their 'big agreements' totaled $3.1 billion in the 2018 fiscal year. It was valued $9.1 billion in FY2020. In FY21, the corporation set a new peak with a revenue of $14 billion.
Are you curious about the source of such large sums of money?
In December 2020, it agreed to a $3.2 billion transaction with Daimler AG, a German automaker. And...possible it's that this will be the biggest transaction in Indian IT history.
And it isn't only Infosys that is considering such huge transactions. Others want in on the action as well. To boost its major transactions business, Wipro even established a new post and appointed a Chief Growth Officer. You can imagine how high the stakes are for the IT behemoths.
India now has a 55 percent market share in the worldwide outsourcing industry for IT and business process management. Goldman Sachs believes the next wave of outsourcing is about to begin, based on the recent spike in agreements. And it's possible that India will come out on top.
As a result, it's easy to see why investors are excited about IT's possibilities.
The 60-stock BSE Information Technology Index has gained nearly 55 percent in the last year alone. It has outperformed other industries such as FMCG and healthcare by a wide margin. And it even outperformed the 30-stock BSE Sensex, which gained around 50%.
Yes, India's IT sector is making a strong return. And stockholders are surely being well compensated. So, what exactly is the bear case? What's the worst that might happen?
One hypothesis is that the momentum is already fading.
Do you recall those big transactions we were discussing? TCS, India's biggest IT exporter, just released its earnings, and it seems that those massive transactions are drying up once again. During the June-September quarter, the value of agreements fell to $7.6 billion. It was $8.6 billion last year.
Then there's the issue of attrition in the sector. Employees are leaving these legacy IT firms in search of better opportunities. IT companies like Infosys and Wipro are currently losing one out of every five workers every year. Trying to keep these terrific people will undoubtedly raise prices.
Do you have any idea what else may affect their profit margins? Traveling for business!
Executives have so far had virtual meetings and signed contracts. As a result, IT businesses that used to spend approximately 3% of their sales on travel will only spend 0.5 percent in 2020. That's a significant amount of money saved. However, whenever travel gets up again, you may anticipate these expenditures to rise again.
So, yes, the IT industry is seeing a resurgence of interest all of a sudden. But, like with anything in life, there's a certain amount of risk involved.
(Source: Finshots, Moneycontrol, Screener.in)
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