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Indian IT smells big deals - Views on News from Equitymaster
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  • Aug 28, 2009

    Indian IT smells big deals

    IT stocks have run up fast and furious over the past few months, and some leading companies are now trading at fair valuations. However, the managements of these companies continue to remain cautious on the overall demand environment. This is despite the fact that the sector has started seeing some traction of late, as seen from some recent large deal wins by leading players. Even yesterday, there were reports of how Indian IT majors have together bagged a large portion of the US$ 1.5 bn 5-year deal from the British oil major, BP. There are further reports today that another oil & gas behemoth ExxonMobil, the world's biggest listed energy company, is in talks with the Indian IT majors for outsourcing contracts worth almost US$ 1 bn.

    These deals highlight how companies with large IT spends are likely to continue outsourcing driven by the need to cut operational costs by almost 30%. It may be noted that the debate around the Indian IT industry during the financial meltdown was whether companies will stop outsourcing due to the political backlash over job losses or will they outsource even more in search of lower cost options.

    So far at least, the second scenario seems to be playing out. In our opinion, this also opens up the possibility of huge volumes upside for the Indian IT sector considering that global offshoring is just around 5% to 6% of the total worldwide technology spend.

    It is also interesting to note that these deals are coming from the large oil & gas majors as they use ERP software extensively to cover their complex operations which involve several geographies and thousands of employees. These companies are now looking for fewer and large to mid-sized IT vendors who can handle huge volumes but at lower billing rates. In fact, billing rates are likely to be at least 10 to 15% lower with an emphasis on work being done in India, i.e., offshore.

    Harley Davidson in India
    The cult motorcycle brand, Harley Davidson is now in India. As per a leading business daily, the bikes will cost in the range of Rs 7 to Rs 15 lakh and will be available from early 2010. It may be noted that the company was granted permission to begin operations in India in 2007, but held back so far expecting a reduction in the 110% import duty on bikes. While the duty is still applicable, the company has decided to go ahead anyway because of the growing superbike segment in India. The company expects to sell in excess of 100 bikes initially.

    We had recently highlighted that slowdown or no, the Indian auto sector, be it domestic or exports, is vrooming ahead. As per a leading business daily, the response of powerful super bikes in India has been really encouraging. In fact, most global motorcycle majors such as Yamaha, Suzuki, KTM, Kawasaki and Honda plan to introduce new bikes in the coming months. It will be interesting to see how the incumbents like Hero Honda and Bajaj Auto take this new competition in their stride.



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