Portfolio Assignment

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Portfolio Management || Shubham Paul || 19BM63123

Industry Analysis – IT Industry

Introduction

The global sourcing market in India continues to grow at a higher pace compared to the IT-BPM
industry. India is the leading sourcing destination across the world, accounting for approximately
55% market share of the US$ 200–250 billion global services sourcing business in 2019–20. Indian
IT & BPM companies have set up over 1,000 global delivery centers in about 80 countries across
the world.
India has become the digital capabilities hub of the world with around 75% of global digital talent
present in the country.

Evolution of Indian IT Sector -


Market Size

IT-BPM industry’s revenue was estimated at around US$ 191 billion in FY20, growing at 7.7% y-
o-y. It is estimated to reach US$ 350 billion by 2025. Moreover, revenue from the digital segment
is expected to form 38% of the total industry revenue by 2025. Digital economy is estimated to
reach Rs 69,89,000 crore (US$ 1 trillion) by 2025. The domestic revenue of the IT industry was
estimated at US$ 44 billion and export revenue was estimated at US$ 147 billion in FY20.
Total number of employees grew to 1.02 million cumulatively for four Indian IT majors (including
TCS, Infosys, Wipro, HCL Tech) as on December 31, 2019. Indian IT industry employed 205,000
new hires and had 884,000 digitally skilled talents in 2019.

Investments/ Developments

Indian IT's core competencies and strengths have attracted significant investment from major
countries. The computer software and hardware sector in India attracted cumulative Foreign
Direct Investment (FDI) inflow worth US$ 44.91 billion between April 2000 and March 2020.
The sector ranked second in FDI inflow as per the data released by Department for Promotion
of Industry and Internal Trade (DPIIT).
Leading Indian IT firms like Infosys, Wipro, TCS and Tech Mahindra are diversifying their
offerings and showcasing leading ideas in blockchain and artificial intelligence to clients using
innovation hubs and research and development centres to create differentiated offerings.

Some of the major developments in the Indian IT and ITeS sector are as follows:

 In July 2020, Infosys won a multiyear deal worth US$ 1.5 billion from investment
management company, Vanguard
 In July 2020, HCL Technologies signed a five-year deal worth US$ 600 million with
telecom equipment maker Ericsson
 In May 2020, SirionLabs, a software-as-a-service (SaaS) provider, raised US$ 44 million
as part of its Series C round led by Tiger Global and Avatar Growth Capital.
 PE (private equity) investment in the sector stood at US$ 11.8 billion across 493 deals in
2019.
 In January 2020, Nippon Telegraph and Telephone, a Japanese tech announced its plans
to invest a significant part of its US$ 7 billion global commitments for data centres
business in India over the next four years.
 As of February 2020, there were 417 approved SEZs across the country with 274 from IT
& ITeS and 143 as exporting SEZs.
 In February 2020, Tata Consultancy Services bagged a contract worth Rs 10,650 crore
(US$ 1.5 billion) from pharma company Walgreens Boots Alliance.
 UK-based tech consultancy firm, Contino, was acquired by Cognizant.
 In May 2019, Infosys acquired 75% stake in ABN AMRO Bank's subsidiary Stater for US$
143.08 million
 In June 2019, Mindtree was acquired by L&T.
Government Initiatives
Some of the major initiatives taken by the Government to promote IT and ITeS sector in India
are as follows:

 On May 2019, the Ministry of Electronics and Information Technology (MeitY) launched
the MeitY Startup Hub (MSH) portal.
 In February 2019, Government released the National Policy on Software Products 2019
to develop India as a software product nation
 The Government has identified Information Technology as one of 12 champion service
sectors for which an action plan is being developed. Also, the Government has set up a
Rs 5,000 crore (US$ 745.82 million) fund for realising the potential of these champion
service sectors.
 As part of Union Budget 2018–19, NITI Aayog was to set up a national level programme
to enable efforts in AI^ and leverage AI^ technology for developing the country.
 In the Interim Budget 2019–20, the Government announced plans to launch a national
programme on AI* and setting up of a National AI* portal.
 National Policy on Software Products-2019 was passed by the Union Cabinet to develop
India as a software product nation.
Achievements
Following are the achievements of the Government during 2019–20:

 About 200 Indian IT firms are present in around 80 countries.


 Total export revenue of the industry is expected to grow 8.1% y-o-y to US$ 147 billion in
FY20. IT-BPM sector accounted for the largest share in the Indian services export at 45%.
 Total number of employees grew to 1.02 million cumulatively for four Indian IT majors
(including TCS, Infosys, Wipro, HCL Tech) as on December 31, 2019.

Road Ahead
India is the topmost offshoring destination for IT companies across the world. Having proven its
capabilities in delivering both on-shore and off-shore services to global clients, emerging
technologies now offer an entire new gamut of opportunities for top IT firms in India. The
industry is expected to grow to US$ 350 billion by 2025 and BPM is expected to account for US$
50-55 billion of the total revenue.
Treynor Measure1 -
Jack L. Treynor was the first to provide investors with a composite measure of portfolio
performance that also included risk.
It uses the concept of the security market line, which defines the relationship between portfolio
returns and market rates of returns whereby the slope of the line measures the relative volatility
between the portfolio and the market (as represented by beta).
The Treynor measure, also known as the reward-to-volatility ratio and the resulting value
represents the portfolio's return per unit risk.

Sharpe Ratio -
The Sharpe ratio is almost identical to the Treynor measure, except that the risk measure is the
standard deviation of the portfolio instead of considering only the systematic risk as represented
by beta.
The Sharpe ratio is defined as:

1
https://www.investopedia.com/articles/08/performance-measure.asp
Jensen Measure

Similar to the previous performance measures discussed the Jensen measure is calculated using
the CAPM. The Jensen measure calculates the excess return that a portfolio generates over
its expected return.

A portfolio with a consistently positive excess return will have a positive alpha while a portfolio
with a consistently negative excess return will have a negative alpha.

Information Ratio2

The information ratio (IR) is a measurement of portfolio returns beyond the returns of a
benchmark, usually an index, compared to the volatility of those returns.
Although compared funds may be different in nature, the IR standardizes the returns by dividing
the difference in their performances, known as their expected active return, by their tracking
error

https://www.investopedia.com/terms/i/informationratio.asp#:~:text=The%20information%20ratio%20(IR)%20is,a
%20particular%20sector%20or%20industry.
Results and methodology –
Portfolio of equal weighted 10 stocks of IT industry for the period Aug 2016- July 2017 –

Variance-Covariance Matrix

Abnormal Returns & CAPM model

Portfolio Performance Measures


Portfolio of equal weighted 10 stocks of IT industry for the period Aug 2017- July 2018 –

Variance-Covariance Matrix

Abnormal Returns & CAPM model

Portfolio Performance Measures


Portfolio of equal weighted 10 stocks of IT industry for the period Aug 2018- July 2020 –

Variance-Covariance Matrix

Abnormal Returns & CAPM model

Portfolio Performance Measures

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