Emerging Markets Equity
The World’s Digital Transformation is ‘Made in India’Carlos Diez, MarketGraderAugust 19, 2021
Since the early 1990s India has built one of the world’s most sophisticated information technology outsourcing and consulting sectors, which today is quickly reorienting itself toward digital services and away from legacy IT outsourcing (think of call center operators helping you troubleshoot your Windows operating system). McKinsey estimates that India’s IT industry will grow to $300-$350 billion in annual revenue within five years from $194 billion today, as digital services jump to $170 to $200 billion per year, or 50% of the industry’s revenue, up from 30% now1. Given the demand for digital and emerging technologies like AI and machine learning around the world, McKinsey suggests that India can generate $285 billion in economic value by 2030 by investing just $10 billion annually in modernizing its IT sector2.
How Can Investors Harness this Opportunity?
While many of India’s most promising technology companies are still private, most of the country’s IT consulting firms are public, including some of the country’s largest in any sector. For exposure to the best of these companies, investors should consider the MarketGrader India All-Cap Growth Leaders Index (MGINGROW), which provides a GARP-based stock selection approach.
Since the fund (GLIN) started tracking the index on 5/1/2020, it has held an average weight of around 30% in the Information Technology sector of which I.T. and Data processing services industries represented around 24% of the Information Technology exposure. Since May 1, 2020, to the period ending 7/31/2021, the index returned 79.61% cumulatively of which around 30% of the contribution to positive return came from the following I.T. and Data processing services companies.
Figure 1. Performance of IT and Data Processing Services Industry Companies in MGINGROW
Ticker Company Name Average Weight* Total Return* Contribution to Return* INFY Infosys Limited Sponsored ADR 5.51 151.25 7.44 532281.IN HCL Technologies Limited 5.05 97.96 5.28 532540.IN Tata Consultancy Services Limited 4.91 61.57 3.36 507685.IN Wipro Limited 4.49 211.44 6.51 540005.IN Larsen & Toubro Infotech Ltd 1.14 204.33 1.50 526299.IN Mphasis Limited 1.01 270.23 1.64 532819.IN Mindtree Limited 0.54 222.95 0.80 500408.IN Tata Elxsi Limited 0.52 229.84 1.01 533179.IN Persistent Systems Limited 0.51 168.60 0.88 532790.IN Tanla Platforms Ltd 0.14 -3.06 0.01 523704.IN Mastek Limited 0.10 209.82 0.22 538835.IN Intellect Design Arena Ltd 0.09 39.66 0.03 543227.IN Happiest Minds Technologies Ltd. 0.07 42.09 0.09 532370.IN Ramco Systems Limited 0.02 -12.06 -0.01
*Average weight, total return and contribution to return represented 5/1/2020 – 7/31/2021. Source: FactSet.
In the 12 months ended last quarter (March 2021), these 14 companies generated a combined $62.5 billion in sales, up 26% from $49.6 three years earlier. In other words, these 14 companies generated about one-third of all revenue booked by Indian-based IT Services companies based on McKinsey’s estimate of $194 billion for the entire industry. This is remarkable considering that there are more than 3,200 foreign companies operating in the country, many of which source a significant part of their IT personnel in the country.
These 14 companies also reported a combined profit of $11.4 billion in the 12 months ended last quarter, 20% better than the $9.5 billion they had earned in the 12 months ended three years earlier (March 2018).3 Figure 2 shows the one and three-year average sales, operating income, and net income growth rates for the 14 companies on the list through the end of March 2021.
Figure 2. 1 & 3-Year Growth Rates for IT and Data Processing Companies in MGINGROW
Sources: MarketGrader, FactSet.
With 55% of the global market share in the services sourcing business4, India is the world’s number one IT offshoring destination. Emerging technologies such as blockchain, cloud computing, artificial intelligence, and machine learning have given the country—and its technology leaders—an entirely new set of opportunities to accelerate the world’s drive toward a digital economy. Investors looking for a differentiated exposure to this opportunity should look to India.
How to Invest
The VanEck Vectors® India Growth Leaders ETF (GLIN) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MarketGrader India All-Cap Growth Leaders Index (MGINGRNR). The Index consists of consists of fundamentally sound Indian companies that exhibit attractive growth potential at a reasonable price as determined by the index provider.
2 Source: McKinsey Global Institute, https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/digital-india-technology-to-transform-a-connected-nation
3 Source: MarketGrader
4 Source: India Brand Equity Foundation, https://www.ibef.org/industry/information-technology-india.aspx
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Authored byCarlos Diez
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