The Indian economy is growing on the back of its reputation in technology. While the sector looks se...
The Indian economy is growing on the back of its reputation in technology. While the sector looks set to continue growing, some valuations are starting to look stretched.
An increasing number of Western companies such as Sainsbury's, British Airways and Cisco have outsourced their software services to India.
Philip Ehrmann, head of Pacific and emerging markets at Gartmore, says this outsourcing trend is critical to the performance of the Indian economy. According to a Dataquest/McKinsey report, in 1997 IT services in India accounted for $380bn. By 2008 it is projected to be around $1 trillion. The new economy presently accounts for between 4% and 6% of India's GDP and it is expected to reach 12% in five years, Ehrmann adds.
Andrew Beal, fund manager, Asian emerging markets at Schroders points out that the outsourcing of software services is still at an early stage in India and is expected to grow.
The country is well placed to provide software services as an English speaking country and IT expertise has been growing for the past decade, with particular progress being made in the past few years, Ehrmann says.
"India is still very much a two speed economy. There is not the scope for young people to go into other professions. Young Indians used to be very attracted to medicine and the pharmaceutical industry, now they are going into software services. There are specialist IT universities now in India which the government was driven to open by Indian IT companies."
Ali Khalpey, emerging market fund manager at Merrill Lynch Investment Managers, agrees the industry is set to grow, pointing out that a leading Indian software services company, Infosys, currently trains up to 5,000 people every nine months and wants to expand to being a 60-70,000 employee company.
He says: "There is a lot of talent in India. In the early 1990s, it was US policy to import cheap, skilled labour from abroad and there was an eruption of IT skills in India. A big driver for Indian IT companies was the arrival of the internet. The Millennium bug was the defining event."
Indian firms work on year 2000 proved that mission critical work could be done and that they were able to meet targets and deadlines, Khalpey says. With year 2000 they were able to build relationships with Western companies and successfully look for replacement contracts, he adds.
Beal agrees: "Leading Indian companies gained entry into the US market, initially to do low, value added work. They built up relationships with large Fortune 500 companies and then grabbed work in the internet and e-commerce area."
Beal says another reason for the attractiveness of outsourcing software services to India is the relative cheapness of the labour. "The cost of a three year experienced software engineer in India is about $40,000, whereas an American software engineer with the same experience can charge $150-200,000."
Khalpey believes the valuations of Indian software services companies are high. He points out that Infosys is currently experiencing earnings growth of around 75% and that by March 2001 its P/E ratio will be 85 based on consensus estimates.
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