Friday, June 5, 2009

How big can Indian IT services market grow

Today I was reading an interesting article. This is by our own NASSCOM. Some of the key numbers in this article are:
1. We exported $47 Billion worth IT software and services in this fiscal year.
2. Domestically we consumed around $13 Billion worth of IT software and services this fiscal year.
3. That makes current size of our IT software and services market to be around $60 Billion.
4. This sector now employs around 2 - 3 Million workers, which today is still a very tiny fraction of around 200 - 240 Million non-agricultural workers we have to feed.

We have big hopes from this sector. Some pundits have said what Oil did for middle east and Manufacturing did for China, IT is going to do that for India.

As I scroll down the article, I find global IT software and services sector to reach $1200 Billion by year 2012. Assuming some growth after that too, it should reach around $1500 by year 2020.
Assuming outsourcing to India is still a preferred option by then and we capture 10% of the market, our size of IT market is going to more than double to $150 Billion. I think that is a reasonable estimate of size of Indian IT market in next decade or so (a decent long term view point).
We are employing around 2 - 3 Million workers now, it may generate maximum employment for say 10 Million workers by then, which again would be a tiny fraction of some 300 Million non-agricultural workers at our hand.

If we ascribe this size to our Indian IT market, then lets look at a valuation of one of the leading listed Indian IT company.
It has a market cap of $20 Billion and revenues of $4 Billion. So it has a share of around 6 - 7% of total IT revenues in this sector. If we grow to $150 Billion by 2010 and this company maintains same percentage share, it would have revenues of $10 Billion by then. What would be its profit margin. That depends a lot on following factors:
1. Labor cost
2. Rent of Land cost
3. Last but not the least value of Dollar against Indian Rupee.

Would the exchange rate stay at around 45 Rs/$ or reduce to a lower level. With so much of dollars printed recently its hard not to justify a lower rate.

Assuming a liberal 20% margin by then it would earn around $2 Billion. So we are today valuing a company at 10 times what it may earn more than 10 years from now. Is this something justified. Well all depends upon our risk perception. Also depends with how much confidence you can predict a long term earning profile of a company. Given a lot of risk factor to exchange rates and also given a liberal estimates for the size of IT industry and this company's revenues, I might not like to pay more that $5 - 6 Billion for its entire business. Today its valued at $20 Billion.

Certainly Indian IT industry has a long way to go forward. I am very positive on Indian IT sector in general. However I also feel that valuation of many companies are done with a lot of optimism.

To conclude by a quote from Mr. Warren E. Buffet:
It is optimism that is the enemy of the rational buyer.

Sachin

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