IT sector, billion dollar dream: Dolat Capital

Dolat Capital has come out with its report on IT sector. The research firm believes that IT sector has the potential to turn into billion dollar entities in the next few years. The Indian IT Services sector, estimated at USD 90bn, has predominantly focused on the global markets which generate more than 75% of revenues. The industry has spread far and wide with over four thousand players comprising of global MNCs, Indian players, Captives and small scale set ups. As is natural for any sector, the top five have consolidated to garner a significant share of the revenues ( 37%) while the top ten have taken 41% share of the total revenues. This has primarily been driven by the ability to scale and offer multiple service capability. The smaller players have been either de rated by circumstances, and hence gone down the margin curve or ended up taking bets that have gone the wrong direction. This trend over the last few years has led to a significant divergence in the size and structure of the Indian IT services sector - there are players with size of USD 2-10 bn range competing with the global players, and then we have a set of relatively smaller service providers in the revenue size of sub USD 500 mn still around. And some of these now are emerging into credible players in some of the niche segments. And we believe they have the potential to turn into billion dollar entities in the next few years. Why a billion dollars: The accrual of a billion dollar in revenues has its own significance considering the fact that the outsourcing maturity is relatively high among the large global corporations (clients) Global 2000/Fortune 1000 companies. Hence a corporate crossing the bar tends to be positioned in a different league. The period of CY2003-2006 saw five of the Indian service providers achieving the Billion Dollar Revenue size. We have seen such a trend since then, however we believe this is likely next three to four years as some of the niche players continue to build upon their niche capabilities and gain share of the client wallet What we like? Why we like? Our report intends to identify from the universe of candidate whom we believe have the potential to turn into billion dollar entities, and generate out performance. Hence are views in the product are structural in nature, and would be subject to tactical revisions to address periodic changes in environment The stock return in IT sector has not been unidirectional across the sector as has been the case in past but has been stock specific owing to polarized growth, earning and valuation triggers. The performing mid tier stocks have returned better than some of the larger stocks on account of better financial performance and comforting valuations. We believe this revenue traction is sustainable driven by niche strength and strong win ratio which would offer operating leverage coupled with Fx tailwind thus supporting multiple (earning) expansion.