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Indian IT: What does 2010 have in store?

Equitymaster 
on 25 January 2010

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The year 2010 promises unseen challenges and new opportunities for companies and investors. It is expected to be a year of significant changes in the business landscape around the globe. Well, a lot changed for Indian IT in 2009 as well. Which other sector can vouch for that than Indian IT, which started the year with very weak visibility and closed with a much clearer picture.
 

In this article, we will discuss what lies in 2010 for the Indian IT sector.
 

To start with, the Indian IT sector which saw a tough time till mid-2009, made a decent come back during the second half of the year. It is now seeing a pickup up in global demand and stability in billing rates that had instead nosedived in 2009 on account of the economic crisis.
 

However, 2010 appears to be better. Global IT spending is expected to increase by 3.3% during this year after witnessing a 3.6% decline in 2009. IT services spending in particular are expected to rebound by a decent 4.5% to reach US$ 816 bn in revenues by the end of 2010. This growth will bode well for the Indian IT industry as well. In fact, the industry regulator – Nasscom – also sees an uptick in IT demand and expects the industry to register a double-digit growth during the coming fiscal – FY11.
 

Well, last year’s downturn was not that bad for the Indian IT industry. It echoed the benefits that businesses can derive by outsourcing non-core activities to efficient best in class IT vendors. As we move into 2010, we see more MNCs hiving off their captive IT units and shifting towards third-party outsourcing as an alternative.
 

We also see increased vendor consolidation wherein client companies will source end-to-end IT services from fewer numbers of tested vendors. This makes the case stronger for Indian IT biggies. We expect them to win more repeat business from their existing clients during the coming quarters. Though no one claims that Indian IT will achieve the pre-downturn levels of 30% YoY growth in some time to come, it has a strong chance to grow at an average rate of 15-20% for the next 5-10 years. An impressive rate to grow at, we believe!
 

Another defining theme for Indian IT during 2010 is expected to be a greater shift towards higher end services. We also see the IT majors renewing their focus towards emerging economies like India and China in terms of future growth potential.
 

Now, while there are good chances that these positive expectations get converted to reality in 2010, whether the overall benefits will trickle down to stock prices of IT companies remains somewhat questionable. High base valuations and an appreciating rupee are the near term concerns that investors in IT stocks must have to live with. In such a scenario, it seems prudent for investors to rationalise their mid-term expectations from the sector.


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