An analysis by brokerage house JP Morgan shows that IT Services industry still produces market-beating returns (with the exception of 2012), contrary to the widely-held view that the outsourcing business model is no longer as profitable as it once used to be.
An analysis by brokerage house JP Morgan shows that IT Services industry still produces market-beating returns (with the exception of 2012), contrary to the widely-held view that the outsourcing business model is no longer as profitable as it once used to be. "Unfortunately, in the past 3 years, this wealth creation has been redistributed away from the set that we know as only Indian IT, towards the global players (Accenture/Cognizant)," says the report by JP Morgan analysts Viju K George and Amith Sharma.
The report also seeks to dispels some myths among investors, about the IT services industry.
Perception 1. The Indian IT industry as a group has failed to beat the broader market in recent times (last 18 months).
Reality 1. True but the prolonged, severe woes of Infosys (a disappointing run that extends now to over 2 years) arguably distorts the data a bit.
Perception 2. The offshore IT Services industry is incapable of producing market-beating returns.
Reality 2. The offshore IT Services industry goes beyond Indian IT players and includes Accenture and Cognizant as these companies compete with their Indian. Using this inclusive set, barring 2012, the offshore IT industry has outperformed the broader Indian markets every year since 2008.
Perception 3. This is a zero-sum industry where one gains at the expense of the others.
Reality 3. A zero-sum situation would have been an accurate categorization if say; Accenture wins an existing book of Infosys's business from Infosys. What we tend to ignore is the huge internal (captive) IT cost trimming which is an incrementally stronger driver for the industry.
According to JP Morgan, quarter-on-quarter revenue growth will bottom out in this quarter. "Our counter-consensus view is that CY13/FY14 could be a better year than CY12/FY13, barring hard-to-estimate effects of certain events such as the US fiscal cliff. A discretionary spending comeback, legacy deals opening up in 2013, and the stability of client budgets could be triggers," says the report.