Thursday, August 10, 2017

Indian IT & Pharma at crossroads

"To say nothing, especially when speaking, is half the art of diplomacy."
—Will Durant (American, 1885-1981)
Word for the day
Mussitation (n)
Silent movement of the lips in simulation of the movements made in audible speech.
Malice towards none
After working tirelessly for 3years, does PM Modi need a vacation?
First random thought this morning
Ahmed Patel has been elected to Rajya Sabha again.
Do you find-
·         Congress any stronger
·         BJP any weaker
·         RaGa any wiser
·         India any better (or worse for that matter)
If not, what was all this brouhaha about?
If yes, Should AP be made opposition's candidate to take on Modi in 2019?

Indian IT & Pharma at crossroads

The market consensus at this point in times seems overwhelmingly against pharma sectors; whereas on IT the street seems divided.
Many readers have been asking my outlook on these two sectors.  I may present my views on these two sectors as follows:
Technical perspective
The underperformance of pharma and IT sectors in the current market cycle (August 2013 till date) shall be evaluated in context of the stunning outperformance during the previous four year market cycle (March 2009 to August 2013). In this period Pharma Index gained 240% and IT index gained over 300%, as compared to Nifty gains of 105%.
So on normalized basis, In past eight years (since March 2009), Nifty has gained ~290%, where as Pharma Index is higher by ~365% and IT index is higher by 425%. Not much to complaint there. To make the context even more clear, Bank Nifty has gained 640% since March 2009.
The worry, as of this morning, for traders should therefore be the banking space (especially private banks) rather than the Pharma and IT space. The underperformance going forward, purely on technical basis, could be more pronounced in financial space, in my view.
Fundamentals
On fundamental basis, I see both the sectors standing at crossroads.
In past two decades, the core of the Indian IT and ITeS sector has been the wage arbitrage opportunity. The focus on innovation and product development has not been to the extent it could have been or it should have been. However, of late many companies have started focus on areas like digital, cloud computing, artificial intelligence (AI) etc. But the focus still mostly seems to be on facilitation of cost optimization of customers' operations, rather than innovating new processes or products.
Under these circumstances, I believe that large IT players, who have the wherewithal to adopt to the changing requirements of the clients will survive. I believe margin pressures will ease as the technical intensity of the engagement rises. Adoption to new technologies will reduce operating cost for the service providers as well. Besides, with development of new technologies, a whole new set of businesses may become technology intensive (e.g., retailing, biotechnology and automotive engg) thus widening the catchment area for Indian IT companies.
Insofar as the smaller businesses are concerned, in my view, the pure wage arbitrage based small businesses will be replaced by the small businesses with some niche technologies and designs. It is the space where the big money will be made over next decade....to continue

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