Monday, 18 February 2013

Sector Snapshot - IT Sector

Information Technology industry has been the stalwart of Indian economy from the past decade. How the IT sector has changed the lifestyle of the Indian middle class is very well known.

It will be worth our while to understand the strength of this sector. It will give us an idea of the extent to which it is necessary to include the IT sector in our investment portfolio.

Every business needs efficiency in its processes. By streamlining a process, a business establishment can reduce its operating costs and at the same time it will be able to manage the business without consuming more time.  This sort of streamlining is also relevant in the service sectors which have a direct interaction with the public-at-large. A streamlined service will have a better recall value among the customers. It is in this area that Information Technology plays a major role.

IT companies provide enterprise business solutions to their clients which are customised to each client according to the business environment of each client. In doing so, the IT sector touches many other sectors like Banking & Financial Services, Automobile, manufacturing, healthcare, science, aerospace etc. to name a few. And correspondingly the IT industry has various business verticals to cater to these industries.  Also, the IT sector will be involved with their products during their life cycle and also their scalability, addition of new features, upgradation and upkeep. Which means that any company operating in this sector will have to set long term goals.

India’s service sector accounts for about 60% of India’s GDP. Of this IT sector contributes 7%.

IT and ITeS forms a USD 100bn sector. 75% of IT software and services are exported and this contributes to 25% of the total export from India.

The developments in cloud computing and easier development tools will mean lesser development costs and lesser time for product development leading to faster deployment. Going forward, this will mean lower costs for the clients with improvements in technology.

An company in this sector with good, stable or expanding operating margin and high utility is a definite recipe for good investment. Hence, the Information Technology sector should definitely be a part of our portfolio.