Posted by:S. G. Raja Sekharan
In the past few weeks, there has been a fair amount of “not so good” news from IT Industry. The big companies are finding it difficult to keep up the growth momentum in both top line and the bottom line. Last year the industry grew at about 15% - this year, the growth is slowing down to 12% ( as per Nasscom). Big companies like TCS are being careful - here is one recent report -(http://www.livemint.com/Money/f6kd6RzSAsp0BYjKSmY7lO/The-outlook-for-IT-stocks-gets-murky.html)
My friends in IT industry are also telling me privately that the basic model of IT services from offshore is now pretty commoditized and the billing rates are falling. Even MNC’s like IBM and Accenture are coming down on rates to compete with TCS and other Indian service providers.
The good old days of IT industry growing at 20% plus per annum and maintaining a 40% gross margin is now history. It will grow at close the 12% now and will also have much lower margin than before. Increasing news of layoffs, lower campus hiring etc are all indicators of this industry slowing down.
If you are working in a company and there is news of layoff in your company, you will stop all long term investing and focus on liquid cash at hand. Well this is happening in all large IT services companies right now.
The Bangalore real estate market is primarily driven by the IT services industry – if the employees of IT industry do not buy, the overall real estate market in Bangalore will slow down. In Pune and Chennai for example there is automotive industry, in Delhi and Mumbai there are other industries – but Bangalore is a one industry market – the dependency in IT industry is very high.
Hence even though Bangalore market managed to outperform other cities last year – I predict that in 2015 and beyond, there will be a stagnation in real estate in Bangalore. Till the IT services industry finds some other growth engine, the Bangalore real estate market will show signs of stagnation.
So if you are investing in a flat or house in Bangalore with a view to exit it and make money in about 4-5 years – be careful. Your ROI may not be great. If you get below 13-15% per annum, compounded post tax, it does not make sense to invest and I believe the Bangalore real estate is in that zone as of now.