Technology Churn

The good news is that Indian IT is prepared and adapting…

It was a disappointing quarter for technology stocks. Most IT stocks announced results that were either below expectations or indicative of larger problems. Despite the sharp correction in most IT stocks (10-15%); investors refuse to be convinced by the IT story. Should they buy at lower levels or avoid the IT space for some time? For that, one needs to understand the shifting epicenter of Indian IT.

BFSI is out; digital is in…

Even Vishal Sikka of Infosys has openly acknowledged this in his quarterly review. IT companies have focused on BFSI, retail, telecom and energy for too long. For many years that was the low hanging fruit, with cheap hands and a cheaper rupee. That is no longer the case. The undertone is shifting to social media, mobility, analytics and cloud. The new mantra for IT stocks is SMAC. Running sweat shops at lower costs and higher efficiency has saturated. IT companies need to focus on leveraging the cloud, collating social media data into coherent intelligence, using predictive analytics and also helping global businesses migrate from the workstation to the mobile model.

Core verticals commoditized…

We have already seen the commoditization of the core IT businesses of BFSI, energy, retail and telecom. There are two distinct trends that IT companies will have to live with. Firstly, the margins in the core BFSI will continue to shrink even as the volumes may either remain static or expand. With newer low-cost centers like the Philippines and Eastern Europe emerging, it will be difficult to fight on the low cost advantage alone. Secondly, volatility will see a marked increase in the core IT space. We have already seen two such instances in the past 6 years. The sub-prime crisis created a fall in revenues from the US and European financial sector. Recently, the sharp fall in prices of crude oil has resulted in a sharp deceleration of energy companies’ investments in IT. If you add the impact of currency headwinds to this equation, the volatility story gets a lot more complicated and multi-dimensional.

How prepared is Indian IT?

The good news is that frontline IT companies have anticipated and largely prepared themselves. There are two battlefronts. First is to cut costs in the traditional IT model and improve delivery. The second is the focus on more of innovative solutions than pure efficient execution.

The good news is that the frontline IT stocks like TCS, Infosys and HCL Tech are changing their business models with a speed and urgency not seen before. The low-hanging fruit is dwindling. For the IT industry it is a long process to reinvent itself and emerge stronger. ©

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