IT Companies - at crossroads
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Printed Date: 26/Jun/2024 at 2:40pm
Topic: IT Companies - at crossroads
Posted By: manish_okhade
Subject: IT Companies - at crossroads
Date Posted: 14/Jan/2012 at 4:28pm
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I spent my 15 years in the indian IT sector. When i read the various blogs then i find a very emphatic case for domestic IT companies like INFY, TCS etc. But my views are different, let me hold them for sometime.
These companies in the past made Indian middle class proud. These players leveraged vast Indian talent to their benefit [and all] which no company has across the world done. This business is not much different than what a contractor does with labors in manufacturing sector. But nobody thought that such simple business model could be such a big game plan. It has given the opportunity to many Ivy League professors to write wonderful case studies. In year 1995 onward IT or outsourcing was a game changer for the world. Earlier white and rich class was happy to outsource dirty manufacturing to third world. But when they saw that white collar work and RnD kinda stuff is too moving out they it took them off but business benefits crushed the sentimental or emotional logic. So needless to say and repeat that things were rosy till 2008. In past few years many things have changed which outsiders [analyst who never worked in IT] are still unable to judge: 1) Leadership crisis - The leader generation who has determinedly driven the business is either retiring or retired. IT Service business is such type that it requires excellent leadership skills which is anything but rare to find. As on date we are clearly seeing the lack of luminary leadership in major players. 2) People factor - Go to any good campus, all top players join the companies but big daddies of IT. So due to lack of better offerings as compared to others, IT daddies are getting 2nd/3rd rate entry level players. IT companies still hope to see their future CEOs coming from among this new generation! 3) Game Changer - In last few years, developed world is getting many choice in the India. Now IT sector is clearly a buyers market. Pricing power is the last thing to hope for. So there is no monopoly left in this business. Unlisted MNCs like IBM, COGNIZANT, ACCENTURE etc have opened their shop to offer intense competition. 4) Yes Mr. President! - Political leaders are discouraging the outsourcing. VISA regime is is getting tougher. Populist measures are slowly gaining favor. If one looks at the annual results for last few years then clearly they are not cheering. Clearly old ways of doing business does not look adequate. Though its good that IT players are just realizing it but still a lot of inertia is visible to make the necessary changes. Sooner it happens better for all. My guess is that, out of 3 biggies one will take the risk and if it looks working profitably then all others will copy it efficiently. This development is something to be watched as an Investor and till it happens better to read forceful analyst reports as a fiction novel and have some fun in boring life  .
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Replies:
Posted By: FutureBull
Date Posted: 14/Jan/2012 at 8:38pm
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Manishji, I agree with most of your points. I have some disagreements.
Leadership problems are artificially created. Look at TCS they have handled well but Wipro, Infy have faltered and reason is same for both promoters kept their control of the management for too long. Problems in Infy would get resolved only when some of the sleepy promoters in the top mgmt. opt to exit. Margins - Some Indian IT cos (e.g. INFY) have taken it as birth right to maintain margin in perpetuity. IBM works on 10% margin and ask any IBM employee he would be very happy with work-life balance. There is writing on the wall, margins would contract ultimately when they achieve very large size. I read some old Gartner report where they had mentioned that total IT spend worldwide is $2 trillion including in house/outsourced. Indian export is just touching $75bn so we have only scratched the surface. My biggest worry about Indian IT is how would they generate non-linear revenue because the current rate of hiring will make them surpass Indian Railway one day!!! These guys would talk about consulting business which is supposed to be scalable,high margin and sticky in long term has been utter failure until now. ------------- ‘The market always does what it’s supposed to — BUT NEVER WHEN’. |
Posted By: manish_okhade
Date Posted: 14/Jan/2012 at 8:41pm
Couldn't agree anymore but it will lead to de-rating. Point is that analyst are still painting rosy picture for INFY. What surprises me is that even Basantji looks fine with high PE of INFY  .
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Posted By: manish_okhade
Date Posted: 14/Jan/2012 at 8:59pm
Thats why i say its on crossroad! Old promoters are still trying to drive business in old ways. New fresh approach is needed to eat up 2 trillion USD pie. |
Posted By: TCSer
Date Posted: 14/Jan/2012 at 10:54pm
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Ultimately as Cognizant founder that IT is nothing but a play on demographic dividend of India.
India does has the best demographic profile among all countries for next 20 years.Further computing is getting miniaturised with every passing years & its usage is entering into all the areas so far untouched like smartcity etc. As long as India has the worlds steadiest supply of coders thanks to its young population Indian IT companies performance will remain strong.Yes they may have to compromise with margins but they should remain fancied cos.See Cognizant. ------------- Share market is nothing but a game of temperament. Success mantra Right Price,Right Business,Patience, Conviction .Do not do panic buying or selling.It may be the only profession where inactivity pays |
Posted By: jagavet56
Date Posted: 14/Jan/2012 at 5:25am
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Interesting points. I would like to add few things in addition to the above. Currently western world are in deleveraging mode and this period will have 2 opposite effects on Indian IT. On the positive side, the strengthening of the dollar will continue due to the risk-averse factor of investors and uncertain mode by which deleveraging will happen. This adds to the better realization of dollar profits earned by IT guys. On the negative side, due to the deleveraging, financial sector in the western world would shrink and this will affect their BFSI vertical very hard (and everyone knows this vertical is the money spinner for IT biggies in recent years). So in my opinion , like points above many positives and negatives will emerge for the IT companies along the journey and it is company with clear leadership, inherently stronger with good internal process and better innovating one will emerge as winner. As Rajiv bajaj said,“I am believer in homeopathy. Hence I believe, environment is never quite as inimical as it is made out. It is one’s internal susceptibility to what happens outside that causes problems. Companies that are stronger from within like individual who are stronger from within, can ride over the problem outside. If you are fundamentally weaker, then I think the slightest hiccup from outside can cause big upheavel. It is more of the reflection of the inside stuff. If the company is inherently stronger, it will adapt and evolve with the market environment". So lets watch how the movie unfolds  |
Posted By: Kautilya
Date Posted: 14/Jan/2012 at 7:01am
This line of argument is a bit far fetched and in my opinion degrowth in large banks are forcing them to cut costs which is benefiting IT vendors. In the last 2 years I have seen two big banks cut jobs in locations like NY/Singapore/London/Tokyo and move them to Pune. The trend is clear, and it is likely to remain like that for some more time. Risks are large banks going down, and increased competition among IT vendors. ------------- My indecision is final. |
Posted By: manish_okhade
Date Posted: 14/Jan/2012 at 8:59am
| I am seeing bit digression on various posts. What we are trying to figure out that whether indian IT companies in current shape deserve to have high PE? |
Posted By: jagavet56
Date Posted: 14/Jan/2012 at 9:59am
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I agree the cost cutting measures forces bank to lay-off employees and also move some of the work to low-cost destination. But i would say that would be piddly in comparison to the amount of financial asset shedding going in big banks(both euro&US) due to change in regulatory norms and stress in financial markets. I doubt big banks will have same amount of IT spending going forward as they had done in their heydays. My viewpoint is BFSI vertical wont give the same 20-25% growth, instead we may see some 8-10% growth. Hence mgmt should look for other greener pastures and re-invent other growth engines to post good growth. |
Posted By: jagavet56
Date Posted: 14/Jan/2012 at 10:17am
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whether indian IT companies in current shape deserve to have high PE? Until some of the concerns mentioned above are converted into topline & bottomline numbers, i dont think they deserve any significant PE correction from the present mark of 20. Still infosys mgmt gave full year EPS growth guidance of 23% Y-o-Y. I hope TCS will match same EPS growth if there is no adverse currency impact as they had in Q2. |
Posted By: prabhakarkudva
Date Posted: 14/Jan/2012 at 11:54am
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95% of Infosys's sales are from repeat customers. The number of additions are dwindling probably because the incremental market to capture out there is shrinking. The ones who are already with one service provider or the other are highly unlikely to switch due to potential switching cost.
In that sense IT companies in the future are going to be much like mature FMCGs - with little growth, some pricing power with existing customers but lot of stability. The only way they can retain the above average PEs is to increase payout and buy back shares.The ones who do that should not see much derating IMO. ------------- Take your chances and keep them in a box until a quieter time. |
Posted By: basant
Date Posted: 15/Jan/2012 at 12:27pm
Here its a question of a leopard becoming a giraffe! Companies that do not declare dividends do not change their character soon. Its much tougher to let go of the cash on Balance Sheet - especially when you have never done it before. ------------- 'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in |
Posted By: rajnsharma
Date Posted: 15/Jan/2012 at 12:46pm
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When global biggies have a net profit margin of 10-15% indian big IT vendors have it between 20-30%. These margins have to shrink as all global giants have operations in India and they have access to the same resource pool. Net-net there is no way Indian IT compabies can increase margin. Only volume can drive the growth in future and any shrinkage in margin has to be compenated by volume growth. In the language of Peter Lynch...they are going to become Stalwart very soon and will no more be growth companies. ------------- Wall Street makes money by it's activity, while you can make money by your in-activity - Warren Buffett |
Posted By: LearningToFly
Date Posted: 15/Jan/2012 at 1:30pm
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My view is slightly different in what ails Indian IT companies. The biggest problem is utter disregard for technology. It is surprising that Indian IT firms give more importance to project managers and VPs than the foot soldiers, the coder. This disdain discourages employees to spend many years in coding. After 3-5 years, everyone wants to be a team lead or PM. 3-5 years is nothing to learn about the software engineering. This is the reason why we, with a team of 100 people, cannot deliver what American team with 15 people can deliver. ------------- Success... at all cost. |
Posted By: subu76
Date Posted: 15/Jan/2012 at 1:33pm
In theory the cash is meant for an acquisition. I thought the management changes in Infy will lead to that eventually. But should the eventual acquired earnings have the same multiple as current multiple is the question.
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Posted By: wildandfree
Date Posted: 15/Jan/2012 at 1:45pm
Bingo! You're spot on, sir!! Whats more, most managers seem to think that all it takes to deliver a software project is getting the process right...I was invited by a Chennai based biggie for interview just to find out what process their competitor was following... |
Posted By: FutureBull
Date Posted: 15/Jan/2012 at 2:23pm
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IMO, the acquired biz would never get the same multiple at least in short term. In numerous occasions in the past big-bang acquisitions have been taken negatively. Look at HCL it acquired Axon a very critical gap(SAP implementation) in offering was filled and now the story is getting better. Similarly Cognizant acquired few small consulting companies and they are well on track.
In INFY's case everyone expects them to acquire some good biz. If they happen to do like one enterprise soft. implementation firm or a credible consulting org., it would actually rally in anticipation of better days. ------------- ‘The market always does what it’s supposed to — BUT NEVER WHEN’. |
Posted By: rajeshb
Date Posted: 15/Jan/2012 at 9:02pm
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While companies like Infy have been talking about transition in to a non-linear growth using consulting, I don't think this transition will be very easy. I work in a bank IT and if I think of Infy, I will think of low cost development and maintenance - not consulting. I would probably use Infy consulting resources for business analysis kind of work in a project, but for business case for new product launches and strategy roadmaps etc, I would think of delloittes and IBMs of the world. This association of low cost developer is hard to kill.
I think it would be more worth while for Indian IT companies (especially the cash rich ones) to try and make in road in to product development and go aggressive in this field. This is where they can use the cash effectively to buy the product capability.
It is very interesting how Indian managements think and how some of their much larger counterparts in the west (with whom they are competing effectively) think. Before i-flex was bought over by Oracle, one of the i-flex products was in direct competition with Mantas, which almost always managed to beat i-flex in bids. This went on for some time and come Oracle - they simply asked i-flex management to buy Mantas!
As Manish said in the opening post, Indian IT companies are indeed at cross roads and new winners and losers will emerge from here.
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Posted By: datta.supratik
Date Posted: 15/Jan/2012 at 9:39pm
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Leadership here is constantly lagging. Well let us say why leadership, the entire quality of resources are lagging. At points the companies need to understand that the horizontal growth is not enough. 'The unitary method will always not hold - 1 mother prepares a baby in 9 months do 9 mothers can prepare a baby in 1 month' Well, that is always not the case in this industry. Although most of the firms have introduced incentives/variable components which they can quickly not pay out if the profits are suppressed. This is why they would always hold margins. In addition PWC and TCS always have option to degrade salary (wouldnt want post links her but search on goggle. Never forgetting that the attrition and lay offs are also the highest in this industry. Lets dance the party in IT off shoring as long as we can. ~Supratik |
Posted By: subu76
Date Posted: 16/Jan/2012 at 6:52pm
Hey, Infy has been a 20-24 multiple stock roughly. If they increase their payout what do you expect the earnings multiple to become?
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Posted By: prabhakarkudva
Date Posted: 16/Jan/2012 at 8:23pm
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I meant, to retain the PEs around these levels subuji since we are discussing if these above average PEs can be sustained by IT companies "reinventing" themselves. ------------- Take your chances and keep them in a box until a quieter time. |
Posted By: subu76
Date Posted: 16/Jan/2012 at 8:30pm
Cool....got it |
Posted By: datta.supratik
Date Posted: 16/Jan/2012 at 9:04pm
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The word 'reinventing' is a little bit puzzling. I believe that most of our firms is service oriented and we have very few if any companies that actually build product or result. I mean a true OEM like Samsung and Infosys. I wonder how this sector would re-invent itself...I probably dont know that is why I am puzzled..excuse plz The sector should however continue to generate returns..look at IBM stake buy by Buffet. ~Supratik |
Posted By: itpro
Date Posted: 16/Jan/2012 at 10:38am
The companies have become so huge but there parmeters to operate them is same. They want to do game changing investment at the cost of the customer because otherwise there margin will get impacted.
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Posted By: manish_okhade
Date Posted: 17/Jan/2012 at 10:12pm
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I wonder whether eClex or alike could be a game changer?
Examples:
1) KPIT Cummins - They developed their inhouse s/w stacks and offers complete solution as part of their service offerings to the client. I dont think any biggies is learning from it.
2) eClerx - Put small team of brilliants to automate the complex financial process and later deploy mass team of mediocre itelligence to execute the servics i a well defied manner. It is resulting in a good PM. Its a tru non-linear business model!
Lets revisit above after few years.
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Posted By: Hrishi
Date Posted: 17/Jan/2012 at 10:53pm
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My two cents,
Many companies are on non-linear wagon. But finding the feet and succeeding in this game is not easy. Only 1 will succeed in 10 or more. Current culture and practices in companies does not encourage it and patience goes off in 2+ yrs, which is too small for such initiatives. (other points of lack of leadership to bring culture changes is well discussed) Given the current norms inside industries I do not see companies rewarding people who are allowed to fail in attempting such activities and also people risking their carriers for such attempts. Lack of start up culture in India makes it even more tougher, and companies with some success demands huge premium. The people/leaders who had some success independently (on absorbed by companies) try to repeat the same formula in big companies and fail as environment does not support it. So good acquisitions (abroad) in current environment and integrating them (but still keeping DNA and culture independent) will be the path for next success... |
Posted By: prat40
Date Posted: 17/Jan/2012 at 11:29am
| TCS, India's biggest software services provider, fell 3.3 per cent after the company released its quarterly results late on Tuesday. Some analysts stated that the TCS numbers came better than analyst expectation and markets should welcome these numbers. The IT major has also added 40 new clients amidst global slowdown. |
Posted By: subu76
Date Posted: 18/Jan/2012 at 8:52am
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As folks pointed out it will get harder and harder to grow linearly. While a lot of colleges are spring up I find a drop in talent as soon as you go outside the known names. (Please note: there are exceptions too) IT companies are trying to offset that by doing their own inhouse training but they can only do so much. I think Indian parents (the govt should probabily focus on primary education) need to think long and hard about China and the future of Indian kids. I find that China is taking giant steps to overcome their educational gaps and it's now started to reflect in real scenarios. In the globalized world no one can take white collar jobs for granted.
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Posted By: manish_okhade
Date Posted: 18/Jan/2012 at 8:57am
Any amount of spoonfeeding of Chyavanprash to Donkey won't convert it into Horse.
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Posted By: itpro
Date Posted: 18/Jan/2012 at 11:48am
The chyanvanprash also needs to be good . |
The quality of the inhouse training is also same as the external institute. A three months training cannot replace 4 years of college education. Moreover there are margin issues if training needs to be more...... and margin is sacrosanct..Posted By: subu76
Date Posted: 20/Jan/2012 at 7:38pm
That seems a bit harsh. Good quality teachers and cirriculum during formative years can make a vast difference IMHO
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