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 .

Edited by manish_okhade - 14/Jan/2012 at 4:39pm

Originally posted by FutureBull Margins - Some Indian IT cos (e.g. INFY) have taken it as birth right to maintain margin in perpetuity.

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 .

Edited by manish_okhade - 14/Jan/2012 at 8:43pm

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.

Originally posted by jagavet56 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).

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.