Thursday, February 21, 2019

Opinion | Who needs Nasscom’s guidance, IT is on the fast track

The IT sector offers a good defensive play in the current scenario

Opinion | Who needs Nasscom’s guidance, IT is on the fast track

The National Association of Software and Services Companies (Nasscom) has said it will stop giving forward-looking guidance for the IT sector. The markets, however, completely ignored this bit of news.

That’s because few people set much store by Nasscom’s projections. It has also been criticized for its methodology on which the forecasts were made.

Nasscom chairman Rishad Premji said "Rather than collating a number, we feel having a perspective would be better. We are not sharing the number as a philosophical decision." Nasscom president Debjani Ghosh put it bluntly when she said guidance is a thing of the past and not the right thing for the future.

In any case, apart from the media, there were no takers for Nasscom’s guidance. Analysts preferred following the spending budget of big clients and international software players rather than basing their analysis on Nasscom’s guidance.

The changing dynamics in the IT sector was one reason why the guidance number was not close to reality. Indian software companies took time to understand the changing nature of the IT sector, which moved from body-shopping to the digital space and to automation.

But now, Indian companies have adapted themselves to the new business conditions and focused on training and re-skilling their staff to align with the changing times.

In a report on Indian IT, HDFC Securities has points out that the sector has ‘hit refresh’, with reinvention across multiple tech cycles and is now tuned to the all-encompassing and ubiquitous ‘Digital’ shift.
The Digital space has grown at a much faster pace of 32 percent as compared to the IT sector growth of 8.8 percent in the third quarter, on a year-on-year basis. The report says that digital is becoming more mainstream as projects move from the pilot to the production stage.

The sector has now reached critical mass and its investment in re-skilling and acquisitions will open up a larger market with better pricing power.

The sector is also seeing robust M&A deals. A brighter future goes hand in hand with strong hiring momentum. The core vertical for the IT space – BFSI (Banking, financial services, and insurance) has also revived, offering better visibility for the companies.

True, there are some headwinds in the form of a slowdown and regulator issues in the US and Brexit, but the positives out-weigh the concerns as of now.

So if the companies and analysts are bullish, is the sector worth investing in?
Taking a simplistic approach and looking at companies purely on a price to earnings (PE) basis, the IT sector is trading close to its long term average PE of 18. With the visibility of growth, the sector does look promising.

But what especially works in favour of the sector now is the uncertainty in India on account of the impending elections. The IT sector offers a good defensive play in the current scenario.



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