Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
The 'Offshoring story': No change in the script - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Jun 22, 2006

    The 'Offshoring story': No change in the script

    These are undoubtedly difficult times for investors in the Indian stock markets. The kind of volatility that has characterised the indices over the past month or so has led to numerous participants fleeing the markets altogether. With the 'bearish sentiment' currently prevailing, a number of investors have lost significant amounts of money. There have been horror stories about how people have lost their houses in this fall having over-leveraged their positions. This fall has taught many people valuable lessons (if at all they are willing to learn), and clearly shows the foolhardiness of 'biting off more than one can chew'.

    However, for longer-term investors, this seems to be a good opportunity to enter the markets and buy stocks at more reasonable valuations. This is particularly true of the software sector, which appears to be on a strong growth path over the medium-to-long term. The correction in stocks, particularly the top-tier stocks from this sector has, in general, not been as much as that in the benchmark index, the BSE-Sensex. This can be seen in the chart below, with all the stocks in question - Satyam, Wipro, Infosys and TCS - having lost less than the Sensex.

    We believe that the software sector is in for exciting times ahead. Let us re-examine the fundamentals of the sector to see whether the recent correction is warranted.

    • The demand environment for offshoring remains robust. This can be seen by trends that are fast beginning to characterise the global software industry. 'Strategic global sourcing' is one such trend, where the project is broken up by the client into various functions and each function is handed to the best-of-breed vendor in that function, who can combine strong domain knowledge, execution skills, global delivery capabilities and optimize costs. An example is the ABN Amro deal, where the infrastructure management part of the deal went to IBM, while the application maintenance part went to Accenture, Infosys, Patni and TCS.

    • A look at the top-tier software companies' client metrics clearly reveals the ever-increasing order book size and revenue visibility, as a greater number of clients have expanded their relationships with Indian software vendors. To give an example, the number of clients giving Wipro revenues in excess of US$ 1 m annually has risen significantly, from 157 at the end of FY05 to 212 at the end of FY06.

    • A look at the sheer size of the opportunity ahead for the sector gives a clear indication that one must look at the long-term and view the broader picture, rather than the short term. Just to quote a few figures, the estimated size of the offshoring market in 2005, as per the NASSCOM-McKinsey Report 2005, was US$ 30 bn. This was against an estimated market potential of US$ 330 bn. India, with its low-cost base, good engineering and management talent, natural time zone advantages and global delivery capabilities, is best positioned to take full advantage of this opportunity. To be more specific, in our view, the top-tier firms will benefit more from the offshoring story, given their significantly larger size, scale, global delivery networks and top quality, visionary managements.

    • The very fact that IBM is investing as much as US$ 6 bn in building up its India centres is a clear vindication of the global delivery model invented by Indian software majors. Other MNC IT majors also have big plans for India, such as Accenture, which expects to have its total Indian employee headcount at around 50,000 over the medium-term. EDS' latest move to acquire MphasiS BFL in order to get a strong 'India footprint' is yet another proof of this fact.

    Therefore, we believe that, given the above fundamental factors, nothing has really changed that significantly in the software sector. We are positive on the sector as a whole. Of course, one must always take into account the risks, which chiefly include currency movements, wage inflation, ever-increasing attrition rates, margin pressures and competitive pressures.



    Equitymaster requests your view! Post a comment on "The 'Offshoring story': No change in the script". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Why Hasn't Warren Buffett Rung the Bell Yet? (The 5 Minute Wrapup)

    Aug 22, 2017

    It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.

    Think Twice Before You Keep Money In A Savings Bank Account (Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    A Darkness Is Spreading Across the US (Vivek Kaul's Diary)

    Aug 22, 2017

    Today, we are attacked by one preposterous thing after another, each of them even more absurd than the last.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working (Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 22, 2017 (Close)