Regulatory IT spends to grow five times by 2015: Goldman Sachs

The brokerage house believes TCS and HCL Tech best placed to gain from this opportunity

At a time when most technology companies are pruning their future growth estimates, Goldman Sachs, a brokerage firm offers a silver-lining for the sector. The brokerage house, in its report, has stated that they expect IT spends by companies on regulatory-compliance to grow five times to $76 billion in 2015 from $15 billion per annum in 2011 -- which could put India's tech giants in a sweet spot.

Rishi Jhunjhunwala of Goldman Sachs Equity research says, "We believe financial services firms (BFS) across the globe will need to comply with a series of regulations over the next 3-5 years (such as Dodd Frank Act in the US). As a result, by 2015, we believe the regulatory related IT spending could constitute 20% of BFS IT budgets versus 5% now and normalise to 10% of budgets long-term, post major implementation work is over."

The report further states that the markets have not factored this currently due to uncertainty on timelines and fungibility of reforms. The incremental revenues for Indian IT industry from this could be about $7.1 billion spread over the next four years, says the report.

"This would raise its revenue CAGR to 15% over FY13-FY16, from 12%, driven by scale and penetration in large BFS clients, core competency in implementation/ maintenance, and market share gains," writes Jhunjhunwala.

The brokerage house believes Tata Consultancy Services (TCS) and HCL Technologies (HCL Tech) are best placed to gain from this opportunity due to their strong execution skills and competitive pricing.

"We expect TCS to potentially gain largest share of the pie at 47%. In a blue sky scenario, TCS’ market cap could rise to $85 billion by FY17," the report adds. They expect HCL Tech to clock in $1.4 billion incremental revenues from this opportunity.

Notably, BFSI forms 42.8% of revenues for TCS and 24.1% for HCL Tech. Any delay in implementation of such reforms though remains a key downside risk.