The future of the Indian IT industry seems to be fundamentally different from the way the country?s IT companies operate now. The current surge in optimism could be due to a pent-up demand, reflected in a jump in FY 2011, but one should exercise caution against extrapolating it to mean secular demand beyond FY 2011. It is still believed that the crisis could change the buying behavior of customers in various ways. While the opportunities continue to be vast, service providers (TCS, Infosys, Wipro and Cognizant) will have to refashion their offerings in some cases, said Edeilwess in its latest report on the IT sector.
A tremendous disruption, both in demand and supply, is likely. Such eventualities impose stringent demands on the IT sector to manage on multiple planes or dimensions simultaneously. No longer will an incremental approach work, especially after 2010 (assuming that 2008-10 is the period of painful adjustment, transition and subsequent flush). In such an emerging scenario, service providers who exert a ?pull? around their offerings as opposed to a ?push? will have an edge, the report stated.
Based on an analysis on how each of the Big three (Infosys, Wipro and TCS) are comparatively placed in the evolving competitive scenario, the report found that many of the strengths of Infosys (premium pricing, leading margins, leadership in select service lines, organic nature of growth), which have manifested in industry-leading performance till now, may not necessarily do so in the future. The crisis has given an equal, if not a better, opportunity to TCS and Wipro to emphasise their strengths and play the offensive game to their advantage. Cognizant has shown how the right systematic investment programme can continue to give differentiated gains even in turbulent times.
Infosys, Wipro and TCS are expected to grow at around 18-20% CAGR in dollar terms during FY10-13. However, according to the research, FY10-13 will see Wipro and TCS at least at par, if not exceeding, Infosys? growth. Also, both TCS and Wipro have worked to build defensible margin structures in their operating models and the period may see Infosys make investments to a greater degree than the other two in areas like end-to-end service provisioning, gaining ground in emerging markets and building in a culture of acquisition assimilation, the report maintained.
Several emerging technologies (cloud computing, collaborative computing, Web 2.0), which promise to transform the way business process solutions/infrastructure management services are delivered, are great technology levelers, taking away some of the bite in the intrinsic superiority of Infosys? efficiency in execution. There is still a considerable value in the Infosys business model for investors, even at these rich valuations but the manifestation of this value will require aggression from the company, which it has traditionally shied away from for fear of diluting its handsome return metrics and margins.
The long-term view is that Infosys? leadership and its ?must own stock? status in the sector will be increasingly distributed towards the others (TCS and Wipro). It is also believed that stock returns from both TCS and Wipro could be double that of Infosys?on a 12-18 month horizon?partly reflecting the narrowing of the valuation gap. The risk to this is that the crisis/downturn is short and cyclical in nature, as opposed to a structural and secular one. If the crisis be a short one, client buying habits may revert to the pre-crisis stage, in which case Infosys? traditional and considerable strengths will keep steering the company forward.