IT Sector Performance over the Years, Its Revival, and 2 Top Sector Funds

As per the historical reports of Central Statistics Organization (CSO) and International Monetary Fund (IMF), India has emerged as one of the fast-growing economies in the last few years and the trend is only going to continue in future.

Supported by various government initiatives, partnerships, and strong democracy, India’s GDP is estimated to grow by approximately 7.5% (Data Source-Crisil’s GDP forecast) in the financial year 2018-19.

Among the sectors contributing towards the robust growth story of the Indian Economy, the Information Technology sector remained one of the main ones.

However, the IT industry has struggled for the last couple of years with slow growth, declining profits, and an uncertain future.

Factors Contributing to the Decline of the IT Sector in Recent Years

1. Digital Transition
2. Recent disruption in the industry by Cloud Technology
3. New government’s policies leading to company restructuring issues

Before discussing the reasons and revival trends of the industry in more detail, it is important to understand the composition, trends, and contribution of the sector in the Indian economy.

What Does the IT Sector Cover?

Information technology is an umbrella term used to define various computing technologies and new communication.

It covers various aspects of managing and processing information in a systematic way. The sector covers several aspects such as the internet, computer hardware, and software which are pivotal to the IT systems collectively designed, managed, and developed by information technology professionals.

India has seen a sharp surge in the hiring of Indian software professionals in recent years by developed countries such as USA, Germany, and Japan. As a whole, the information technology industry has shown the highest growth rates over the last many years as compared to any other industry.

Let’s further break down the sector to understand the composition.

The Entire Information Technology Industry Mainly Comprises of:

1. Software Segment
2. Hardware Segment
3. ITES-BPO Segment

Further, the total software and services segment comprises of:

1. IT services and products
2. ITES-BPO, engineering services
3. R&D and software products

Growth and Performance of IT Sector

As per the recent report of NASSCOM (The National Association of Software and Service Companies), the IT sector share, in the Indian economy, is approximately 7.5% of the gross domestic product (GDP).

The Business Process Management (ITBPM) industry grew by approximately 8.1& in 2016-17 alone to US$ 139.9 billion. As one of the fastest growing industries in India, the IT sector revenue is estimated to grow by further 10% in 2018-19.

Below is the estimated sector-wise breakup (average) in the coming financial year:

1. Hardware segment-estimated to grow by 18%.
2. Information technology services segment estimated to grow by 20%.
3. Software products and BPO segment-estimated to grow by 15%.

How Has Information Technology Sector Contributed to Wealth Creation?

Analyzing the data and trends of last decade reveals robust wealth creation (over 90,000 crores by the year 2002 only) in the IT sector. Another interesting trend set by the industry is attracting large foreign direct investment in tune of over 1000 million USD of by the year 2004 alone.

If you deep dive into the major factors facilitating such growth and development of information technology industry in India, some of the worth mentioning ones include:

1. Comparatively low cost of technical labor
2. The government initiatives to promote technology-based industries
3. Consistent Foreign Investment in information technology industry
4. Focused investment in quality control and process management tools to improve the quality
5. The mathematical and logical prowess of IT professionals in India
6. Relatively simple legal systems & procedures in India
7. Consistent Technical innovations
8. Targeted Investments in the Sector

Market Size of the Indian IT Industry

Over the years, the IT industry has played a key role in defining the country’s economy. It is considered as the fifth largest sector of India (in 2013-14), contributing to almost 8% of the overall GDP of India.

Below are some of the figures reinforcing the robust size of the IT Industry:

1. The industry has generated 120 billion U.S. dollars annually in the financial year 2013-14.
2. There has been a consistent rise in IT end-user spending in the country with 79 billion U.S. dollars (by the end of the year 2016).
3. The major names in the IT service providers are from India, including Wipro and Tata Consultancy Services (TCS).
4. The sector provides employment to millions of people directly and indirectly.

Recent Trends of the IT Sector

As the world is getting more and more digitized with new and emerging IT technologies, the future workforce holds unlimited possibilities for better and more refined business outcomes.

Among such extremely promising IT technologies, Robotic Process Automation and VR (Virtual Reality) are the ones that can profoundly impact and transform the entire workforce of the future across sectors and present great scope to drive business outcomes.

Robotic Process Automation

Robotic process automation (RPA) is a new-age technology that allows the workforce of any business to configure a robot in the form of a computer software in order to effectively capture and interpret existing applications for various functions such as:

1. Easy and fast processing of business transactions
2. Effective manipulation of data
3. Seamless communication with other digital systems
4. Triggering responses appropriately

VR (Virtual Reality) Technology

Whether it is the popularity of the social games such as Pokémon Go or Snapchat Selfie lenses, the idea of Virtual and augmented reality is the latest trend and talk of the entire social sphere. The augmented or virtual reality is actually an old technology which got a new lease of life through social media.

Virtual Reality (VR), until recently, has been an abstract idea mostly seen in futuristic scenes in TV series and movies.

However, VR is now the way of life whether through online gaming, Google Cardboard, or several other demos or technologies. Virtual reality gives new opportunities to the brands as well to connect with their audience by sharing experiences on social media.

Some of the latest virtual reality trends gaining momentum include:

1. Video evolution in future
2. Paid visibility on the social platforms
3. Rapid expansion

Irrespective of such IT innovations, the sector has seen a sharp decline over the last 2-3 years making it essential to interrogate for the reasons behind the same.

Decline of the IT Industry

Apart from Digital Transition, recent disruption by cloud technology and the new government’s policies leading to company restructuring issues, the other main reasons for the declining profits and growth slowdown in the IT sector include:

Complete Shift of Focus in Using the Technology

With the boom of new digital technologies such as social media and mobile and cloud technology, there has been a rapid shift in the technology spending pattern of users from traditional IT services such as application maintenance to the cloud (SMAC), the Internet of Things (IoT), and intelligent automation techniques.

Decreased Spending on IT projects

With a sharp decline in the allocated budget for tech projects, IT services firms and their clients cut down the spends in traditional IT services further straining the sector.

Other Cyclical and Structural Issues

Indian IT firms struggled during the surge of cloud computing and digital services, contributing towards the decline of the IT sector.

Additionally, the constrained IT budgets also contributed to the low economic growth globally. Although these issues were cyclical and structural, IT budgets gradually improved with the recovering economy allowing the industry to increase their spending on IT services.

Despite the decline, the Indian IT service industry collectively worked towards both reviving the sector as well as building digital capabilities.

An increase of approximately 4% in the digital accounts of a fair share of India’s IT-business process management (IT-BPM) exports in financial year 16-17 [Data source-NASSCOM] asserts the efforts put together by the IT companies as a whole to give a positive boost to the IT industry.

Revival Story of the IT Industry

Following a tough phase, the Indian IT industry is slowly returning back on track with the overall sector clocking a growth of approx 28% in the last one year.

As per the Edelweiss research, the year 2018 has seen a systematic revival of the IT sector with digital services improving across functions including engineering, research, and development services (ER&D). Some of the indicators reinforcing the revival of the IT sector include:

1. Growth in the YOY net profit numbers of major IT players including Infosys, TCS, Wipro, and Tech Mahindra.
2. The rapid increase in the deal size with various IT companies signing a spate of large deals, including tech giant TCS announcing its largest digital deal worth $50 million in December 2017.
3. Consistent rise in new orders, strengthening of digital services and higher revenues, and positive growth of mid-tier IT companies such as Hexaware and Mindtree.

What Makes the IT Sector Interesting

Contrary to the belief that the declining growth rates will lead to the fall of information technology (IT) stocks, the overall IT index at Nifty has risen at an annual growth rate of 7% since 2007.

The recent government initiatives such as a strong focus on digital India campaign, the resurgence of US economy, and devaluation of Indian currency further makes IT industry a hot cake.

Below are some of the facts and statistics confirming India’s strength in the IT Sector:

1. IT-BPM sector in recent years has become one of the most significant growth catalysts for the economy contributing to both public welfare and India’s GDP.
2. A massive 60% of global IT firms leverage Indian expertise for testing services before going global with their software products.
3. India is leading in capturing a decent portion of the global technology sourcing business with Indian IT industry standing at a figure of 7% growth overall.

The market sentiments especially make it easy for midcap IT companies to take the benefit of the situation and move forward swiftly towards the goal of long-term investments.

Furthermore, considering the export-based nature of the IT sector, there are higher chances of the sector being benefited from the decline in the rupee rates against the US dollar.

There is certainly a huge potential that IT industry investment presents both nationally and internationally. The main growth drivers of the sector include:

1. Various emerging geographies and verticals such as healthcare, retail, utilities, etc. and a consistent growth in the sector due to automation, new platforms, and hi-tech products.
2. Revival in demand of better IT services from developed economies such as US and Europe.
3. Shift in consumer focus by adopting new technology along with focused Government initiatives.
4. The surge in the SMAC (social, mobility, analytics, cloud) market which is further estimated to reach USD 225bn by the year 2020.
5. Foreign investments under the automatic route in various IT fields including software development, data processing, business and management consultancy, market research, and other major analysis services.
6. Various other initiatives such as: Special Economic Zones (SEZs) Policy and the establishment of Software Technology Parks (STPIs), various exports incentives under the foreign trade policy, National Task Force initiative on IT and Software Development.

Future Ahead

Following a dull period of instability and slow growth, the Information Technology industry seems to be recovering gradually. There are several big players investing in the sector in hope of better prospects and long-term business health. Overall, the future of IT companies and sector as a whole definitely seems positive in the coming years.

If this convinces you about how good the sector is, you can explore investing in IT sector funds.

Top IT Sector Funds

1. ICICI Prudential Technology Fund
2. Tata Digital Fund

Happy investing!