Today Mindtree Consulting has gone below its IPO price of Rs 425.
Just 9 months back, the IPO had been subscribed 103 times. Today no one even wants to buy the stock at Rs 425.
Even Zylog Systems (Current Price Rs 314) is trading below its IPO price of Rs 350.
This shows the extent of damage done to the sentiment for IT stocks by the falling USD and slowing US economy.
My brother works for Cognizant Technology Solutions - one of the bigger IT services companies in India.
In the previous two years, the company had given him a VCD system and a microwave oven as a Diwali incentive.
This year the company has given nothing. .
The company's NASDAQ listed stock - CTSH, has come down from $48 in February to $30 in November. New business is not coming as fast as it did in the last few years.
I suggest everyone should stay away from stocks that are dependent on the US economy. Things look pretty bad in US and it is very risky to bet on a US recovery in the near future.
I think this is the time which will give an opportunity to IT companies to prove themselves. There are various ways by which these companies can cut down their costs. Innovative ideas are being put to test. Simply charging the client more won work, these companies have to drastically cut down on costs.
Interesting article in today's DNA Money: Why looking inward won't do for IT firms.
Quote:
Alok Kumar, head of technology for the Mukesh Ambani-led Reliance group, said he has more or less given up on established IT vendors in favour of alternate solutions such as in-house development and open source.
"Companies only want to sell you boxes, with a $100 million licence fee... People who are selling have lost touch with reality. They come in suits and try to sell us things we don't use," he told a mildly startled audience of IT vendors.
The entire IT sector has been built by business coming from US/EU.
If these economies are not going to grow, IT companies also cannot be expected to show strong growth in the future.
As the Indian economy grows, INR may strengthen further.
Also wage inflation is (very) high in India and if IT companies want to retain the best talent, they have to keep increasing wages....year after year after year.
With slowing growth and reducing margins, IT sector may go out of market's radar.
After more than 15 years of strong growth, HUL lost its growth momentum and has become a boring stock - something that remains perpetually rangebound.
My guess is that the entire IT sector will go the HUL way.
It will become something that is simply bought on sharp falls and sold on sharp rallies.
I don't see the IT sector going anywhere in next few quarters.
If you have better stocks to buy, you should exit the IT sector.
[Note: This post is about the Information Technology (IT) industry and excludes BPO/KPO]
I have been working the IT industry for 14 years now. Starting in 1996, I am now trying to contemplate what is going to happen to this industry going forward. Here are my somewhat random thoughts:
1. Stuck in the outsourcing destination mode: We still do outsourced software development and maintenance work. Indian IT has not been able to move on to Products development or high-end consulting. (Believe me, our so-called consultants are nothing but glorified software developers). Some companies like I-Flex did manage to develop reasonable products and sold out later, but their share in the overall Indian IT is very small.
2. Over-crowding due to low entry barriers: For the amount of money you can earn, IT is the easiest industry you can get in to. Smart BCom or BA graduates with no IT background can be trained in to software development in 3 months. You can read a Java book and become a reasonably skilled Java developer with 3 months practice. Try making these people in to Architects or doctors in similar timeframe. 5 friends can come together and start an IT company overnight. These low entry barriers has lead to overcrowding of IT companies and profitability will slowly diminish.
3. No credible intellectual property or assets: Most big It companies have been in this field for decades (20 years minimum I would say) but for such a large period of time they have nothing to show for Intellectual Property. Yes we do have small count of patents but the credibility of even these is suspect. Most patents are related to non-commercializable heads (mostly process related such as business continuity planning) as against real commercializable assets. In fact one of the main purposes of such frivolous patents is help in obtaining visas when sending people onsite. One of the arguing points in most H1B applications is that the consultant has so-called patented or unique skills for which local skills in the US cannot be obtained, thus the need to send someone from India.
4. No USP or differentiator: Other than our command of English language and comparatively lower costs we do not have any USP. Other countries are fast catching up. I work in a large IT firm and in the past year we have lost deals to companies from Indonesia, Malaysia, Brazil, Argentina, Chile, Poland, Vietnam etc. ... and China is fast catching up on English proficiency. Wage levels are rising and the cost differential is slowly diminishing. We are finding it increasingly difficult to differentiate ourselves from the new upstarts.
5. Low skills: It takes 1-2 years of project work for a trained person to become really productive and another 2-3 years minimum to gain expertise required to work independently and develop a firm understanding and command of technology. Unfortunately 5-6 years experience is the level at which most people in Indian IT move from development to management. So we never develop the deeps skills required to bring in innovation.
I think the super growth phase of this industry in India is over. The next 5 years will see the industry stabilize and eventually stagnate. Sometime in the next decade the downfall will begin.
Last edited by sudhashbahu : 2nd August 2010 at 04:06 PM.
Reason: Added point 5 about skills
Let us remember one thing—of all the software which Indians use to make their outsourcing money, most have been invented in the US or European countries. Right from C, C++, Java, .Net, or the Internet or name any other innovative technology, nothing has come out of India. And I can assure you that if the government's current stand continues, none will come out in the future. We will have all kinds of excuses for being second grade. There is no dearth of excuses for inefficiency and incompetence in India.
Anyway, why pick on the IT sector? The way the nation is running and the level of morality all around, I get the feel we're moving on the inertia of the past.
Thats the only industry I have worked in and the only one on which I can claim the right to comment on
Sorry! The way I phrased it was wrong. It was more of a general comment.
In any case, just because one has worked in one industry doesn't mean being oblivious to all that is happening around us, isn't it? So I think you're wrong in thinking that you can't comment on anything else. (Of course, one can argue that this thread is about the IT industry which has been praised to the skies by all and sundry.))
A very interesting book by Bob Lutz on the downfall of the US Auto Industry: Car Guys vs. Bean Counters.
The crux of the matter is that people who knew about cars were sidelined and the show was (is?) run by MBA types.
"Techies VS Bean Counters?": If you consider that the comments in the book apply more or less to the Indian IT industry, you can very well predict its long term future.
Does the appreciating rupee creates a short/mid term opportunity for some picking in IT sector. So far TCS has been my favorite in IT arena but any other mid cap suggestion?
The falling Rupee will provide some relief to this sector in the short term. In my personal opinion (not based on any specific fact) is that anybody overexposed to the IT sector should use the opportunity to bring down exposure.
Post 2 years scenario would be somewhat stable when it comes to the global economy Because the US recovery is underway though slow but it would be comparatively much better than what it is now . And due to the uncertain and turbulent situation at the global stage the Indian IT companies are cutting down their revenue expansion for a while so it is a smart move as of now.
That is why i predict a better positioning of them in the next 3 years as well.
Mr. sudhashbahu, your article is interesting. earlier i worked in IT sector/pvt firm and now i am working in IT dept of Min of defence. why i left the IT sector was there is no job security, work overload. I also felt that within some years IT sector will stabilize and eventually stagnate & the salary will also come down. but now i feel even after the recession it is still going on and some of my friends who are still in IT sector taking salary 5 times more than me. sometime i feel that i took a wrong decision by joining in govt sector. but still i feel the govt sector is very secure & no tension about future.
There may be a dip in salary offered in Pvt IT sector in future because of the competition but still i feel IT sector will going on.
Mr. sudhashbahu, your article is interesting. earlier i worked in IT sector/pvt firm and now i am working in IT dept of Min of defence. why i left the IT sector was there is no job security, work overload. I also felt that within some years IT sector will stabilize and eventually stagnate & the salary will also come down. but now i feel even after the recession it is still going on and some of my friends who are still in IT sector taking salary 5 times more than me. sometime i feel that i took a wrong decision by joining in govt sector. but still i feel the govt sector is very secure & no tension about future.
There may be a dip in salary offered in Pvt IT sector in future because of the competition but still i feel IT sector will going on.
Grass always looks greener on the other side .
Depends on what you want really - job security vs higher salary and so on.
Mr. sudhashbahu, your article is interesting. earlier i worked in IT sector/pvt firm and now i am working in IT dept of Min of defence. why i left the IT sector was there is no job security, work overload. I also felt that within some years IT sector will stabilize and eventually stagnate & the salary will also come down. but now i feel even after the recession it is still going on and some of my friends who are still in IT sector taking salary 5 times more than me. sometime i feel that i took a wrong decision by joining in govt sector. but still i feel the govt sector is very secure & no tension about future.
There may be a dip in salary offered in Pvt IT sector in future because of the competition but still i feel IT sector will going on.
I do not see any immediate problems for the IT sector. In fact in the short term, I feel IT sector may do reasonably well.. My pessimistic opinion applies only in the long-term.
I do not see any immediate problems for the IT sector. In fact in the short term, I feel IT sector may do reasonably well.. My pessimistic opinion applies only in the long-term.
What would be your rough timelines for short-term ( 2-3 years ) and long term ( 5+ years ) ?
Misusing Visa provisions is an open secret in the Indian IT companies:
- Using business visas to work and get around restrictions on work visas
- Fraudulently claiming "Managerial" duties to avail of simpler Blanket L1A route (no longer simple now)
- Claiming Fraudulent and /or Inflated skills
- Subverting the process for Labour Approval (Does anyone really believe that some software skill is not available in the US and an Indian needs to go there? )
- Quoting higher salary in the visa application while actually paying less to the employee
- Processing Labour Approval for a state where it is easier to get and then sending the employee to work at another state without processing Labour Approval for the other state
- Paying "stipend" or working expenses instead of salary. Company projects a salary, files taxes and keeps the tax refunds.
I am sure the authorities knew all of this and chose to look the other way when the going was good. Now with the economy going down and unemployment going up, the back-lash has started. Currently L1A (managerial) visa rejection rates for people less than 10 years experience are close to 100%. Claiming specialized skills (L1B) visas have 100% rejection rates. H1B visa rejection rates are climbing. They are now above 40%.
I have no doubt that the guy suing Infosys is saying the truth. It remains to be seen how he will prove it tough.
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