From sunrise to sunset and beyond, is it darkest before dawn?

Information Technology (IT) and Information Technology Enabled Services (ITES) were the darlings of investors in 2000 and were referred to as sunrise industries. There was disenchantment after the bursting of the dot com bubble, however investors started dating IT and ITES companies again after a break.

Coming back to the present times, the current valuations of many of these companies suggest that these are operating in sunset industries. Companies like Sonata Software, NIIT Technologies and Zensar are trading at valuations that suggest that the earnings of these companies will keep declining in the years to come.

Even more interesting is the case of HTMT Global Services. This company is trading at a Market Capitalisation which is lower than the cash held on its Balance Sheet !!! The rest of the business (which is profit making) is available free.

 There is no doubt that the IT and ITES sector has been facing a lot of headwinds in recent times.

  1. Rupee had been appreciating against the US Dollar
  2. Salaries of employees were increasing at a rapid pace
  3. US & European (and global) economy has been seeing difficult times resulting in business slowdown
  4. Tax breaks given to these companies have been under threat

 It is on this account that a lot of companies (especially in the small and mid-cap space) have been quoting at liquidation values. Is this scenario going to continue?

  1. Rupee which was continuously appreciating has started moving in the reverse direction. Suddenly there is a realisation that India is not China. India has trade and current account deficits and if capital flows subside, the natural path for the currency is depreciation.
  2. Young college grads and not that young employees are coming back to their senses. People are not able to switch jobs every 6 months at higher salaries. A lot of sectors hiring people like mad (Insurance, Banking, Stock Brokers, Retail and IT  / ITES companies) have slowed down their hiring. Some are even letting go of people. The focus now is more on productivity and not on salary hikes or ‘retention’.
  3. The global economic woes could continue for some time. However some would argue that this will give added impetus to off-shoring. This may be debatable, however please note that it is not the end of the world. Economies will rebound given enough time for adjustment.
  4. One may have to live with higher taxation or the government could realise the importance of IT and ITES all over again given the need to generate employment and earn foreign exchange. Also was there not something in the budget where the small and mid-cap companies would get a better tax treatment than the larger companies?

Me thinks that the pessimism of the market is somewhat overdone in the small and mid cap IT/ ITES space. Any thoughts on that?