Indian IT – No Danger for Now – Goldman Sachs

Goldman Sachs Analysts have set a new theme of China being a threat to the Indian IT Services industry. As for any meaningful competitive threat to Indian IT from Asian countries, China is potentially the most threatening in our view. But there are material
challenges for Chinese companies to accomplish this. Goldman came to the view that anecdotal evidence is exaggerated and a meaningful challenge to Indian IT’s global market share might not occur till 2015. We project the Indian IT sector to continue to grow at 15% CAGR, achieving a market cap of US$241bn (from US$138bn now) by 2015E (annualized return of 11.8%).

Though China offers immense potential as an end-market, Indian companies will find it difficult to enter the market given the strong preference of Chinese customers to deal with local or established global firms. We believe that a change in business model approach, with stronger local tieups, recognition of different operating environments and a flexible approach to margins/pricing are imperative to succeed.

Though Infosys has a larger presence in China, most Chinese mgmt we spoke with were of the opinion that TCS (TCS.BO; Buy) was making significant inroads into local Chinese market. In our view, this owes to TCS’ BFSI and product expertise, and its business ties with the Chinese gov’t. We forecast TCS to be the #1 Indian firm in China with revenues of US$250mn by 2013E, overtaking Infosys in revenue generated from China.

By 2015, we expect India to remain competitively better than China as a preferred offshoring destination, but think the gap is likely to shrink as China makes a further push at boosting its IT services industry.