Year-to-date,the Indian IT industry has handsomely outperformed the MSCI India/ Nifty despite the overhang caused by introduction of the Immigration Bill in the US Senate. Sure,the currently depreciating INR is providing stock support,helping offset this overhang. But the fact that Indian IT Services players as a collective group have failed to beat relevant market indices (Nifty/MSCI-India) in 2012 and rising competitive intensity is prompting questions about the future wealth creation potential of this industry (in stock returns) minus exogenous props such as the weakening INR. We examine some perceptions & realities here Perception 1: The Indian IT industry as a group has failed to beat the broader market meaningfully in recent times. Reality 1: This is true only for FY12 and also the prolonged woes of Infosys (a disappointing run that extends now to nearly three years) arguably distorts the data slightly,given Infosyss weight in the index. Perception 2: The offshore IT services industry is incapable of producing market-beating returns. Reality 2: The offshore IT Services industry is a global industry that must go beyond Indian IT players. So,we must include Accenture and Cognizant (both OW) in this set as these companies substantially compete with their Indian IT peers. Cognizants business model is similar to its Indian peers (although its margin model is different) while Accentures boost in the recent past (last 3+ years) can be attributed substantially to its ascendancy in outsourcing (not consulting). Using this inclusive set,we find that with the exception of 2012,the offshore IT industry has handsomely outperformed the broader Indian markets every year. Perception 3: This is a zero-sum industry where one gains at the expense of the others. Reality 3: In a slower growing industry,polarisation is the order of the day consistent with the Darwinian principle of the survival of the fittest coming to the fore. Also,a zero-sum situation would have been an accurate categorisation if say; Accenture wins an existing book of Infosyss business from Infosys. What we tend to ignore is the huge internal (captive) IT cost trimming which is an incrementally stronger driver for the industry. Some companies have estimated the in-house IT market being at least as significant as the third-party market (Gartner estimates pertain to the third-party market). Conclusions of our analysis: The offshore IT Services industry still produces market-beating returns (with the exception of 2012,it has done so every year since 2008). Unfortunately,in the past three years,this wealth creation has been re-distributed away from the set that we know as only Indian IT towards the global players (Accenture/Cognizant). Thus,it has become imperative for investors to take stock-specific approaches,which renders the task of identifying outperformers difficult. Also,investors can no longer consider offshore IT Services = India-listed IT players. India-focused investors who do not have the mandate to invest in non-India listed plays may not find this finding comforting. Investment view. We reiterate our oft-stated thesis that FY14 will be a reasonably better growth year for IT Services than FY13. We have OW ratings on Infosys & HCLT. TCSs (N) valuations look a tad punchy in the near term. All said,the evolution of the immigration bill needs watching (as it relates to visas) the overhang due to this may be partly offset by the weakening INR. Asia Pacific Equity Research
