Many Indian IT Companies Will Be 'Irrelevant' In Five Years: Girish Pai

Many Indian IT companies will become "irrelevant" in the next five years, says Girish Pai, head of research for institutional equities at domestic brokerage Nirmal Bang. 

"One does not really know how many players will be relevant say post five years. (Indian) IT has its own set of big issues. The entire model is getting rejigged. Automation is going to lead to a situation where the labour cost arbitrage model that has been a big competitive advantage of the industry is slowly getting withered away," says Mr Pai, who closely tracks the IT sector. (Also read: Infosys, Wipro leaders warn of challenging times for Indian IT)

"I would probably think that Indian industry is not as well prepared for digital era."

Mr Pai adds that "right now investors are kind of looking at five to six large players and a tail of small and midcap players. Five years down the road, I would think that there is going to be some amount of consolidation. Of the five to six large players, two to three will probably make it or still remain fairly relevant."

"I would probably think that a lot of midcap players will probably be irreverent in the five-year timeframe," he said. 

Mr Pai said that the fast-growing digital space is very competitive. "And at this point in time I don't think Indian companies have been able to make as big a mark as Accenture has been able to do," he said. (Also read: Road ahead not easy, says Infosys CEO Sikka)

On the traditional services side of IT businesses, "automation and cloud is leading a compression in project sizes".

This is leading to a "situation where we will probably see mid-single digit dollar revenue growth for the IT industry for some amount of time to come...2-3 years," he said.  

Outlook on IT stocks

IT stocks have outperformed over the past three months as compared to the broader markets and this may continue for next three to six months, Mr Pai said. 

But this outperformance of IT shares is not due to improvement per se on the IT services front, he said. "It is not that things are improving on the IT services front except for the fact that the rupee has depreciated a bit in the last few months. The worry has been more about from earnings of domestic sectors (due to demonetisation)."

The Nifty IT index, which is an index for performance of IT stocks, has gained nearly 2 per cent in the past three months as compared to 6 per cent loss for Nifty. 

Mr Pai said he is not bullish on the IT sector from a long-term perspective. "It is a sector where I think you should take money away during this phase of relative outperformance you are going to probably see in next six months."