Pakistan Technology & Communication sector outperformed its peers globally during 2022. For reference we have compared it to MSCI AC Asia Pacific Information Technology Index which is the most relevant comparable index.
Pakistan’s IT sector has outperformed the MSCI AC Asia Pacific IT Index, declining by 22% in US$ terms in 2022 compared to 33% decline in the latter mentioned index. In PKR terms the local IT sector performance remained almost flat in 2022.
The sector outperformance compared to international benchmark has mainly been driven by Systems Limited (SYS). Company’s market cap has increased by 4% in US$ and 34% in PKR terms in 2022. This was led by strong earnings which grew by 103% in PKR terms and 60% in US$ terms in 9M2022. Dollar based revenue and PKR denominated cost along with expansion in employee base helped SYS register strong growth.
IT exports of Pakistan also increased by 9% in 11M2022 compared to stagnation in IT services globally according to Gartner (IT consulting firm).
After SYS the other 4 companies among the top 5 by US$ market capitalization have declined; TRG (-28%), PTC (-45%), AVN (-29%) and AIRLINK (-60%) in 2022.
We have selected MSCI AC Asia Pacific Tech index as a benchmark because Pakistan as a country is included in the index. The benchmark has 204 constituents where the minimum free float market cap constituent has a value of US$133mn.
The MSCI AC Asia Pacific Information Technology Index is a free float-adjusted market capitalization index which captures large and mid cap securities across 5 Developed Markets (DM) countries and 9 Emerging Markets (EM) countries in the Asia Pacific region.
DM countries in the index include: Australia, Hong Kong, Japan, New Zealand and Singapore. EM countries include: China, India, Indonesia, Korea, Malaysia, Pakistan, the Philippines, Taiwan and Thailand.
MSCI Asia AC Pacific IT Index is trading at 2022 P/E of 12.8x against a 1-Year Forward P/E of 14.2x. This means that a decline is expected in forward earnings of the index constituents.
According to Citi Bank Wealth Outlook 2023 Global GDP is set to decline to 1.7% compared to 3.3% in 2022. In light of this export oriented IT companies of Taiwan, China and India will face a setback in revenues and earnings.
In the MSCI Asia AC Pacific index higher weight is garnered by Semiconductor, IT hardware and electronic component constituents. According to Gartner (An IT consulting firm) semiconductor revenue is projected to decline 4% in 2023.
Going forward we expect IT sector of Pakistan to outperform peers in the Asia Pacific region due to low base, availability of cheap labor and expansion into Middle East where the economies of scale of local companies allows them to garner projects of lower ticket size. These contracts are not feasible of bigger IT services companies of the region.
Local companies are able to hire cost effective resources to deliver these services which are lower in cost by at least 35% to 40% compared to other Asia Pacific countries. Therefore, IT industry experts expect the Pakistan’s IT exports to grow at a CAGR of 15-20% for the next 3-5 years.
On the other hand spending on IT services, software and cloud solutions is expected to stay resilient due to companies digitizing their operations and moving their data and operations to the cloud to save costs. IT companies of Pakistan are mostly services based with SYS, TRG, AVN, NETSOL and OCTOPUS offering software/IT consulting services.
We are overweight on Pakistan listed IT sector with SYS as the top pick. Please refer to our detailed report “SYS: Dominance in tech space to continue” issued on November 17, 2022 for more details.
Courtesy- Topline Securities