)
Information technology stocks have more than held their own in some of the worst market conditions. The BSE IT index has returned 11 per cent over three years and 45 per cent over five years, while the Sensex has returned six per cent and 31 per cent, respectively, over the same periods. The past year has been an exception, when the broader market has outperformed technology stocks. Over a 12-month period, tech stocks have returned 5.21 per cent while the Sensex has returned 10.35 per cent. Though not all are posting a disappointing performance, the relative underperformance of players like Infosys and Wipro has dragged the sector's overall returns down meaningfully.
The sector's underperformance over the past year is forcing many to ask if outsourcing as an industry is past its prime. Over the last decade and a half, the sector has generated phenomenal returns for shareholders but will the road ahead be the same, is moot. J P Morgan has attempted to put the whole debate into perspective by including the performance of global players like Cognizant and Accenture, as it believes wealth creation has been "redistributed away from the set that we know as only Indian IT towards the global players (Accenture/Cognizant)." But if one factors in the performance of global players like Accenture and Cognizant, the technology sector continues to lead the benchmarks in wealth creation.
Given that the offshore software services model is a global delivery one, investors must also look beyond the Indian players. Even though the margin profile of Accenture and Cognizant is different from Indian companies, the business model remains similar. Accenture's growth over three years has largely been driven by the company's "ascendancy" in outsourcing and not consulting. If one includes the global players, too, the sector has outperformed the broader Indian market every year, with the exception of 2012. J P Morgan's analysis shows global MNCs have delivered superior returns compared to the Nifty over three-four years and their wealth creation ability has been rising consistently. These global players outperformed the Nifty by five per cent in 2012 in dollar terms. As a result, investors looking to partake in this wealth creation need to look beyond Indian players. Fund managers of India-focused funds might find it tough to invest in non-Indian companies just as domestic investors might find it tough to invest in Cognizant and Accenture.
