Understanding the Past, Present & Future- Part I: Analyzing India's IT Sector

One way to simplify your stock selection is via selecting the right sector to invest in. But how do you know which sector is bullish? To help you, Captwist brings its Sector Analysis Series where we will be analyzing sectors of the Indian economy. Read our first article on the IT sector of India.

Understanding the Past, Present & Future- Part I: Analyzing India's IT Sector

The one challenge forever present for any investor in the stock market is how to pick the right stock? And say, if somehow you were able to decide that, what is the guarantee that the stocks you have invested in will keep growing? Questions like this scare every investor. And not to forget the wise words of the OG- Mr Warren Buffett-

“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”

You must be thinking, so how does one understand which stock/sector will be profitable in the long run? To make your investing process easy, Captwist has prepared a Sector analysis series where we will be publishing a range of articles analyzing the different sectors of the Indian economy.

But what is sector analysis?  🤔

Sector analysis is part of the top-down investment strategy that involves assessing the economic status of a specific sector.

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The top-down investment strategy is an investment analysis approach that first analyzes the macroeconomic factors (GDP, inflation, interest rates, etc.) and later microeconomic factors (sectors and companies). The main advantage of this approach is its accuracy in analyzing the present and predicting the future of a stock within a global framework.

It is based on the assumption that different sectors perform differently during the business cycles. For example, when the economy's growth is positive, the financial sectors make substantial gains. And when the growth is slow, the healthcare sector will incur marginal profits.

Today, we have got covered the IT sector for you. 😊

ANALYZING GROWTH OF THE IT SECTOR IN INDIA

To present a simplified picture, we will be dividing the trajectory of the IT Sector into three phases:

  1. Phase I (1960 to 2000)
  2. Phase II (2001 to present)
  3. Phase III (2022 onwards)

PHASE I (1960 to 2000)

“In the business world, the rearview mirror is always clearer than the windshield.”
- Warren Buffett

Post Independence, the Indian government-led reforms under the Five-Year Plans mainly focused on the primary and secondary sectors. The service industry was not even recognized as a 'sector.' They were government-controlled and had to pay exorbitant tariffs. It led to the untapped potential of the then existing small IT players.

However, the big start of the IT sector goes back to 1974 when Burroughs, a foreign manufacturing company, asked its Indian sales agent- Tata Consultancy Services (TCS) to outsource programmers for computer system installation abroad. It led most of the existing small IT companies in Bombay to outsource their programmers.

The share price of Wipro rose from Rs 1/ share in 1997 (IPO) to Rs 388/ share by the beginning of 2000.

However, it was only after 1984 that the Rajiv Gandhi-led government brought a change in the picture. Initiatives like the New Computer Policy (1984), reducing tariffs, granting delicensed status to the IT sector provided needed push and hope to Indian and foreign investors. Thus, laying the strong, favorable, and growth-oriented foundation for the future of the IT sector in India.

5 year growth of the IT sector in India; Source: Niti Aayog

PHASE II (2001 to present)

If there was one sector that could boom despite the COVID-19 pandemic, it was the IT sector. In 2021, the IT sector of India ranked third worldwide with 608,000 cloud experts across all verticals, including technology. Moreover, it is estimated to reach US $93 billion by the end of FY 2021 (7.3% YoY growth).

Data on IT companies in NIFTY 50 for the last FY; Source: Tickertape.in; Last updated on 21.3.2022 @6:30 A.M.

But what led to this constant positive graph of the IT sector? Note that these are the same reasons that make the IT sector an attractive place for buying stocks.

Competitive advantage

One of the biggest strengths of the IT sector in India has been the cost advantage over other competitors. The abundance of skilled labor and an English-speaking pool of people have been big reasons for the cost-cutting. Moreover, companies like TCS, Wipro, Infosys have been successful in becoming big credible brand names.

FDI inflows

The computer software and hardware sector in India attracted cumulative foreign direct investment (FDI) inflows worth US$ 74.12 billion between April 2000 and June 2021. The sector ranked 2nd in FDI inflows as per the data released by the Department for Promotion of Industry and Internal Trade.

The rapid growth of the start-up market

Today, India has over 7,000 tech start-ups (started less than five years ago) and over 1,200 technology start-ups established in just the last year (Data as of 2018).

Data as per "NASSCOM Tech Start-up Report 2021 – Year of the Titans"

Policy support

The Government of India in 1961 brought the Income Tax Act. Under this act, the IT companies were given 100% exemption on profits from the export of computer software till 2010. The act deals with related laws and policies for establishing a fair and uplifting IT environment.

Similarly, the Software Technology Parks of India (STPI) has also proved its efficacy by giving rental waivers, tax concessions, no location constraints, and other benefits to the units registered under STPI.

Recently, the proposals announced in the Union Budget 2022-23 like introducing digital currency, Kisan drones, e-Passport, PM GATI SHAKTI, and others will bring transformational growth (directly or indirectly) in the IT sector.


PHASE III (2022 onwards)

“Digitization has meant that Indian IT companies are growing at the fastest pace seen over the last decade. This theme may remain one of the predominant ones."
Santosh Kumar Singh, head of research at Motilal Oswal Asset Management Co.

Despite the worldwide lockdowns and resultant rise in operational costs, the IT sector could stay afloat with sufficient profits. Analysts are bullish about the ever-present and ever-increasing demand for technology services.

According to the latest report by Gartner, Indian companies will spend $105.2 billion (estimated) on IT in 2022, reaching $1.3 trillion, up 7.9% from 2021. Gartner’s 2022 Indian CIO & IT leader survey also indicates increasing investment in artificial intelligence/machine learning capabilities, business intelligence, analytics, and digital business solutions, despite new COVID-19 variants.

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Click here to find out the best Blue Chip IT stocks in India- 2022

Conclusion

The IT sector is expected to grow to US$ 19.93 billion by 2025  and has the potential to reach US$ 1 trillion by 2030. These bullish forecasts by the analysts and the reasons for the constant growth of the IT sector (mentioned before) in India reaffirm the faith of the stock market investors in the IT sector.

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IT Sector is always among the 'Best 3 Sectors' to invest in the long run.
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If there's anything you want us to cover in our next article, please write us at 'hello@captwist.in'