You got it right in terms of where the IT cycle was headed. Markets have rerated the stocks. What is now left for investors? While business is growing, attrition rates are high and margins will remain under pressure.
One thing which is very clear in tech is a strong demand environment and this strong demand environment is likely to remain for the next five-seven years. It is not a one- or two-year trend. It is a sustainable trend. Attrition or margin pressure can be managed as long as the demand environment is very strong because in a strong demand environment, the competitive intensity also remains low and clients have the ability to take on hikes.
We have had a reasonably strong run over the last one year or so, but a lot more money can be made in IT services which is no longer what it used to be traditionally. All the companies have seen a transformative change in terms of services they offer. They are offering transformative solutions to the business and not only doing a particular patch. They are offering end-to-end solutions from product to delivery to the customer and experience management and everything else.
I feel we are still in a long cycle. I do not think one should get worried and perturbed around some of those attrition issues. Attrition comes only when there is a demand environment. Otherwise, there would not be any attrition. I would take more comfort in that rather than worrying about it.
How different is the current IT boom from what we saw a couple of years ago?
There are two things — IT services and technology. IT services per se will be widespread because the overall demand environment is very strong. Companies right now are struggling to keep pace with the demand environment and a lot of benefits will percolate down to mid tier IT companies. We can already see how they have been growing and the order book accretions. So many small companies will migrate to mid or large cap.
So I do not think it will be as transformative as it was last year. In so many years, India has created $165 billion of IT services exports. In the next five years, we will add almost half or maybe more of that to go to $250-270 billion. When that kind of size comes about, the impact of that is transformative on the country as well as the sector.
New age internet companies are listing after going through successful rounds of fundraising with PEs, venture capitalists. They have moved from being soonicorns to unicorns — multi billion dollar companies that are now listing on Dalal Street. Do you see the potential for those kinds of returns for retail investors as well?
New tech is a whole new space which is going to get created over the next five years and what we have seen is just the beginning of a very big trend. Historically, most of Indian businesses in this space have gone abroad to raise capital and get listed because there was underappreciation in India. Now Indian investors have matured, especially the institutional investors and the listing has shown that. We are witnessing the beginning of a very long trend and most investors, including public market investors will figure out how to evaluate these companies because this is a very early stage.
For any emerging sector, there is a lot more appreciation in the US market. In my opinion, we should look at this because this will encourage many more players to come and scale opportunities which can become 5x, 10x, 15x, 20x. But of course, you must have a pretty long time horizon to understand the franchisee. Also one should be ready with the fact that in tech, disruption risk will always be higher. So it does not come risk free. Detailed understanding is needed for platforms like Zomato. It is in a kind of monopolistic situation and is unlikely to get disrupted but who knows! Things change in technology very fast so one has to be very-very careful about those. Many of these will be success stories, many of them will not survive but one has to play the game.
The nature of Nifty 50, the composition of BSE and NSE is shifting more towards the new age internet companies. How do you see the nature of the indices shifting towards these new companies?
There is always a big shift happening every 10 years in the index, keeping in pace with the underlying change in the economy, What was big in 90s, did not exist in 2000 and what was there in the 2000s, would not exist in this decade. This keeps changing. And there is no denial that technology is going to rule the way. Consumer tech will come, enterprises will lose more tax and product oriented companies, which so far were underappreciated and did not scale up, would come up.
The new edge of tech oriented growth across the globe, including in India, is here to stay. As these many more players come on the bourses, they will find a space in the indices over a period of time. I do not know whether it will be a trillion dollar or trillion and a half; we will only know in time but it will be a significant portion and we have to pay attention to that because investing is all about not only what is happening, but also what is going to happen.
If you can figure out what is going to happen or where the trend lies in the future, then you can be a little ahead and position your portfolio differently rather than approaching with a historical bias because investing needs to keep evolving constantly.
Ultimately it is about cash flows, dividend yield. But these factors will be overlooked as some of these new age companies will go public. I am talking about the public market investors who are ignoring the current excitement?
All markets will have euphoric phases, booms and busts. We tilt towards pessimism as well as extreme optimism. The only thing one has to figure out is at what stage you are. Currently, I do not think we are anywhere close to an euphoric phase.
The underlying changes that are happening are very structural in nature and we are at a very early stage. Amazon in the first 10-12 years did not have any cash flows and dividend yields. But in every newsletter, Jeff Bezos talked about the importance of cash flows and dividend yields. So he was building the business with a different mindset and his core set of investors who looked at Amazon differently, not only gave him money but also benefited from it significantly.
The world is changing and winner-takes-it-all platforms are getting built. We will have to build new ways of evaluating businesses. If we do not, if we continue to look at those newer opportunities, new ways of doing business with the same lenses, you will probably miss out on that . I am not saying that everybody should follow this. Ultimately, there are thousand ways and one can make money by sticking to their own style. So I am not recommending any style. All I am saying is that this is a peak of a dot-com bubble or peak of the infrastructure. Of course there will be excesses like in any market. But at this stage, I would at least be saying that this is way up there on the euphoria side and is probably the beginning of an early trend.
