Our two-week marketing in US/Europe suggests abundant caution and underweight stance on the sector among investors. Risks of tech transition — cloud, automation and ability to adapt; pricing pressure and its impact on margin profile; slowing growth and macro issues emanating from Brexit were top of the mind.
Despite this sector-wide caution and scepticism in its ability to meet FY17 dollar revenue growth guidance, Infosys was owned across a majority of portfolios.
Key questions on the tech transition ranged from who could succeed, ability of Indian vendors to scale up given Accenture’s leadership and the overall opportunity.
Our five-point framework to analyze positioning within digital suggests TCS and Infosys having a significant lead vs other Indian IT vendors although an equal lag vs ACN.
ACN’s first mover advantaged is also overemphasized, in our view, as Indian vendors have adapted to changes in the industry in the past.
At the current scale, digital growth for Indian vendors has been insufficient to offset the stagnation of legacy, a risk to medium-term growth revival.
Margin pressure remains a key concern given the pricing pressures across the sector. While pricing remains one of the levers of margin, other levers like utilization and wages could be tweaked to offset the impact of pricing pressure over the next two-three years.
We also believe that these risks are factored into forecasts and multiples for the sector, to a large extent.