Investing in India IT Sector's bull market has already turned many individuals into millionaires and propelled many mutual fund managers into star status. This has been especially true for those who place their bets in the late 90s during the "Y2K scare" era and held on through the great outsourcing wave in the early part of this decade in the twenty-first century. Companies such as Infosys, Wipro, Satyam Computers have returned over 600% growth in the last seven years for their shareholders. So what does this mean for those wishing to invest in the IT sector of the India market today? Now that much of the world is aware of the great outsourcing boom that this sector has enjoyed, has all the future growth been priced in? Is it better to look elsewhere for the type of gains this sector has enjoyed in the last decade?

The growth in the Indian economy and the dominant role that the IT sector has played in its growth and acceleration are now well documented stories, and the proverbial cat is out of the bag. The competition for outsourcing is also heating up with China, Philippines and Russia placing an extraordinary amount of emphasis in competing for lucrative software projects. The Indian IT advantage however remains strong, with an educated, English-speaking workforce that is ready and willing to move up the value-chain and is seeking out higher-margin projects such as business process outsourcing and solution integration projects. To counter the rising salaries of its workforce, these companies are themselves outsourcing simpler, pure-programming projects to countries such as Romania and to China as well. What we are witnessing is the first-mover advantage for India in establishing a well-developed system and process for handling outsourcing contracts. India today continues to get more than 70% of all IT outsourcing projects.

Multi-national IT Companies competing strongly

Globally focused companies such as IBM, Oracle, SAP, JDA Software and Microsoft are not sitting quietly, and letting the Indian firms sweep up all available opportunities. Instead of outsourcing their work to these Indian companies, they are directly hiring and setting up shop in India. IBM for example, has raised its Indian presence from to over 70,000 in 2007, hiring almost 800 employees a month for the last few years. Now IBM does not need to outsource projects to an Indian firm, but would instead get the work done by its own employees at a lower salary than they would have had to pay elsewhere. Other international companies are following suit.

There is a second, stronger reason for this increased focus on direct hiring in India - and that is, a need for focusing on the booming local market. The rapid growth in the economy has led to a consumer boom which is fueling the retail industry, the automotive industry and other consumer products industry. There are IT opportunities in each of these industries as they seek to modernize their facilities and become more efficient in their operations. The Indian IT companies as well as the global players want a piece of this rapidly growing pie.

Indian IT companies remain competitive and aggressive

Overall, the Indian IT companies remain poised for strong growth on the back of three factors:

• Continued strength in outsourcing/offshoring projects as they continue to move up the value chain
• Increased focus on the booming Indian IT market through boom in the rest of the economy
• Inroads into developed markets by seeking to provide solutions and solution integration directly to customers onsite in these markets

Competition is stiff, but the Indian IT sector is becoming tougher as well, and they are still playing in an environment of growth, which always commands high P/E multiples in the stock market.

Stocks a good buy?

For the conservative investor, it would have been better to buy a mutual fund or ETF that covers the entire sector - but there is no such ETF today. The closest thing is the Wisdom Tree ETF that covers a broader market. Individual stocks are likely to remain more volatile, but the established firms such as Wipro, Infosys etc. are likely to provide above average market returns over the next several years. As always, make your own decisions, as we can only provide a general lay of the land as best as we see it in these articles for your benefit.