India is moving towards becoming a digital economy. Being one of the fastest emerging sectors, IT has shown global reach, lower risk, high- quality infrastructure, and connectivity that contributes immensely to the Indian economy. Its growth is escalating due to components such as BPO and government initiatives such as Digital India, MeitY Startup Hub (MSH).
IT in India is an industry consisting of two major components: IT services and business process outsourcing (BPO). The sector has increased its contribution to India’s GDP According to NASSCOM, the sector aggregated revenues of $180 billion in 2019, with export revenue standing at $99 billion and domestic revenue at $48 billion, which is growing at over 13%.
As of 2020, India’s IT workforce accounted for 4.36 million employees. India is the leading sourcing destination across the world, accounting for approximately 55 per cent market share of the $200–250 billion global services sourcing business as of 2019–20.
The IT-BPM industry’s revenue was estimated at around $191 billion in FY20, growing at 7.7% year on year. It is estimated to reach $350 billion by 2025. Moreover, revenue from the digital segment is expected to form 38% of the total industry revenue by 2025. The digital economy is estimated to reach a size of $1 trillion by 2025.
Yet, a study done on the IT companies that have a market capitalisation of more than Rs 5,000 crore showed none of the Indian IT giants could make it to the Top 5 in terms of highest 10-year returns.
1) Among the top companies with highest 10-year returns, Tata Elxsi ranked highest with 30.56%.
2) P/E ratios of major IT companies range from 20 to 30, which is less than market average.
3) The aggregate five-year returns of all major IT companies are less than their one-year return. In case of Mindtree, one-year return is 8 times the aggregate five-year return.
4) IT companies have performed exceedingly well in last one year, surpassing the returns of last 5 years. For most of them, the one-year return has been 4-6 times their 10-years returns. In the case of Oracle Financial Services, one-year return was over 6 times of its 10-year returns, which is definitely an extraordinary performance.
5) Even the 5-year return is higher than the 10-year return.
6) Companies like Wipro and Oracle have a very low 10-year returns.
7) IT companies with high 10-year returns have given decent one-year and five-year return as well.
So what are the major factors facilitating such growth and development of this sector?
a) Low cost of technical labor
b) Consistent foreign investments
c) Continuous innovations
e) Debt-free financial architecture
India is the topmost offshoring destination for IT companies across the world. Having proven its capabilities in delivering both on-shore and off-shore services to global clients, emerging technologies now offer an entire new gamut of opportunities for top IT firms in India. The industry is expected to attain a size of $350 billion by 2025.
Recent Infosys, Wipro results for Dec 2020 quarter confirmed the continued growth prospects for the industry. Meanwhile, Tata Elxsi continues to outperform.
(Ajit R Sanghvi is Director of MSS Securities. Views are his own. This study is for academic purposes only and not recommendation to invest)