Indian IT-ITES Industry

Siddharth Gupta Yugnesh Rathore Arpita Mandal Ratnesh Tripathi Deepti Sharma

1/2/2014

Indian IT-ITES Industry

This would seem like an odd time to do an issue which focuses on the question: what will drive the Indian IT industrys growth in the next decade or so? There are reasons for asking that question. Even before the global financial meltdown, many analysts felt that the cost advantages and the offshore delivery model perfected by Indian companies might not remain an advantage in the long run. For one, the cost arbitrage was bound to come down. More importantly, global players such as IBM, Accenture, HP and Capgemini have started their own India centres and are also aiming for the same customers. Finally, many of the customer verticals which propelled growth in the past decade BFSI (banking and financial services) or telecom are showing signs of slowing down. At one point, there was a feeling in the domestic industry that the way out was to have a strong consulting service component. Unfortunately, the potential for consultancy was probably not as much as expected. So what will drive Indian ITs next growth surge? Big players, medium-sized firms and small companies as well as dozens of analysts to get an answer as to how Indian it industry can grow. Indian IT needs to do several different things. At one level, it needs to change its model of operations and move away from the old-fashioned ADM (application, development and maintenance) model that has delivered the bulk of the growth in the past. Whether the new model involves innovations such as outcome-based billing or opening near-shore centres depends on the company. At another level, the Indian IT industry needs to focus on the new, highgrowth areas cloud services, mobility services, big data, etc. if it plans to remain relevant in the marketplace.

Latest Trends Of Indian IT-ITES Industry

The face of IT is changing rapidly and theres no going back. As a direct result of current economic necessities and ongoing technological developments, the IT industry is undergoing a number of fundamental shifts. In order to remain relevant to their clients and customers, it is increasingly important for businesses to monitor these developments closely, adapting essential products and services to meet new marketplace demands. Weve compiled the following list of 5 top industry trends changing the face of IT to help your business prepare for the fast-approaching future:

1. Mobile Devices --The basic tools that businesses and consumers use to interact with each other are currently undergoing a major behavioral shift. More than one-third of the conventional PC market is on the verge of being replaced by smartphones and tablet computers in the coming year and this trend shows no signs of slowing. By 2014, it is predicted that mobile Internet usage will overtake traditional desktop usage. 2. Cloud Computing --As businesses look for new ways to scale back on overhead and infrastructure costs, they are turning increasingly to Software-asa-Service (SaaS) and other cloud-based computing solutions. Spurred in no small part by growing consumer confidence in this new technology, more and more businesses are discovering the advantages of moving their software applications to remote private cloud networks. As the economy recovers and growth resumes, these solutions allow for low-cost, on-demand scalability. 3. Virtualization --Just as cloud computing and SaaS have revolutionized the way companies access their software applications, recent trends in virtualization are allowing businesses to eliminate entire server farms and slash the associated operating costs. In addition to streamlining and making IT infrastructure more economical and flexible, server virtualization has laid the groundwork for more strategic IT initiatives going forward. As a result, Infrastructure-as-a-Service (in which companies rely on equipment owned by service providers) and Platformas-a-Service (IaaS with a software development framework) are also growing in popularity . 4. Telework/Virtual Offices --With cloud computing capabilities and other advances in office connectivity growing by leaps and bounds, companies worldwide are realizing the cost-saving benefits of virtual office environments. By moving away from traditional physical office-based business models toward remote network structures, more and more businesses are taking advantage of this new technology to increase productivity and reduce overhead.
5. Alternative Productivity Applications -- Influenced by the recent economic

downturn, companies are looking for new methods of improving productivity, increasing employee efficiency and optimizing their overall business processes. In this pursuit, new solutions in videoconferencing, unified communications and business intelligence applications will continue to grow and develop, since they help employees to work collaboratively in remote office environments. In addition to improvements in these already established areas, there is considerable demand and room for growth in the productivity software sector,

with more and more businesses adopting new programs designed to improve efficiency, lower operating costs and streamline business processes.

Changes in pricing
Indian software companies are searching for answers to the conundrum of how to price their services as the market shifts irrevocably from a time-tested model which has served them well for several decades. More exacting clients and technological changes have meant that the traditional model of charging for labour is giving way but no single replacement has been found yet. The popularity of cloud-based delivery of services over the Internet is reshaping the pricing landscape along with what is being called an "outcome-based model" of paying for predetermined business results. "Clients are looking at their IT partners being responsible for delivering on business or process outcomes beyond managing specific technology mandates," said Chandrashekhar Kakal, senior vice-president and head of business IT services at Infosys, India's second-largest software exporter. Buyers are increasingly looking to link payments to business outcomes, which indirectly also transfers some of their risks to service providers, who for years have been charging clients based on number of hours worked by engineers on a project. But, given the shaky macroeconomic environment and shrinking technology budgets, corporations are insisting that service providers deliver tangible, measurable value and not merely technology. The push to revisit outsourcing industry pricing models comes at a time India's $108 billion ( Rs 6.4 lakh crore) IT industry is facing fundamental shifts in the way technology services are bought. Once known for growing at a double-digit pace year after year and generating employment for hundreds of thousands of engineers, the sector has now slowed down considerably and may even see shrinkage in employment.

Factors leading to growth in the IT/ITes sector are:

Low operating costs and tax advantage. Favourable government policies. Technically qualified personnel easily available in the country. Rapid adoption of IT technologies in major sectors as Telecom, Manufacturing and BFSI. Strong growth in export demand from new verticals and non-traditional sectors as public sector, media and utilities.

Use of new and emerging technologies such as cloud computing. SEZ as growth drivers; as more of SEZs are now being set up in Tier II cities and about 43 new tier II/III cities are emerging as IT delivery locations.

India IT Industry present revenue & future prediction

Milestone year for Indian IT-BPO industry-aggregate revenues cross the USD 100 billion mark, exports at USD 69 billion Within the global sourcing industry, India was able to increase its market share from 51 per cent in 2009, to 58 per cent in 2011, highlighting Indias continued competitiveness and the effectiveness of India-based providers delivering transformational benefits Export revenues (including Hardware) estimated to reach USD 69.1 billion in FY2012 growing by over 16 per cent; Domestic revenues (including Hardware) at about USD 31.7 billion, growing by over 9 per cent. Software and services revenues (excluding Hardware), comprising nearly 87 per cent of the total industry revenues, expected to post USD 87.6 billion in FY2012; estimated growth of about 14.9 per cent over FY2011 Within Software and services exports, IT services accounts for 58 per cent, BPO is nearly 23 per cent and ER&D and Software Products account for 19 per cent. The industry continues to be a net employment generator - expected to add 230,000 jobs in FY2012, thus providing direct employment to about 2.8 million, and indirectly employing 8.9 million people. As a proportion of national GDP, the sector revenues have grown from 1.2 per cent in FY1998 to an estimated 7.5 per cent in FY2012. The industrys share of total Indian exports (merchandise plus services) increased from less than 4 per cent in FY1998 to about 25 per cent in FY2012. While the global macroeconomic scenario remained uncertain, the industry exhibited resilience and adaptability in continually reinventing itself to retain its appeal to clients. Embracing emerging technologies, increased customer-centricity, deepening focus on new markets, adopting new business models are some successful growth strategies followed by the industry

Market Structure of IT-ITES Industry

The IT industry has emerged as one of the most important industries in the Indian economy contributing significantly to the growth of the economy. The IT industry of India got a major boost from the liberalization of the Indian economy. India's software exports have grown at an annual average rate of more than 50% since 1991. The structure of the IT industry is quite different from other industries in the Indian economy. The IT industry of India is hugely dependant on skilled manpower. Primarily a knowledge based industry, the IT industry of India has reordered significant success due to the huge availability of skilled personnel in India. The industry structure in the IT sector has four major categories. These are -

IT services IT enabled services Software products Hardware IT services IT services constitute a major part of the IT industry of India. IT services include client, server and web based services. Opportunities in the IT services sector exist in the areas of consulting services, management services, internet services and application maintenance. The major users of IT services are Government Banking Financial services Retail and distribution Manufacturing IT enabled services The services which make extensive use of information and telecommunication technologies are categorized as IT enabled services. The IT enabled services is the most important contributor to the growth of the IT industry of India. Some of the important services covered by the ITES sector in India are Customer-interaction services including call-centers Back-office services Revenue accounting Data entry and data conversion HR services Transcription and translation services

Content development and animation Remote education, Data search GIS Market research Network consultancy Software products Software products are among the most highly exported products from India. The software industry in India originated in the 1970s and grew at a significant pace in the last ten years. Between 1996-1997 and 2002-2003, the Indian software industry grew more than five times from 2630 crores to 13200 crores. During the same period software and service exports from India grew by almost twelve times.

Hardware The hardware sector of the It industry focuses on the manufacturing and assembling of computer hardware. The consumption of computer hardware is high in the domestic market. Due to the rise in the number of IT companies, sales of desktops, laptops, servers, routers, etc have been on the rise in recent years. Many domestic and multinational; companies have invested in the computer hardware market in India. Another categorization in the structure of India's IT industry is related to the market. There are two major market classifications - the domestic market and the export market. The export market, dominates the IT industry accounting for 75% of the revenue.

Challenges faced by Companies

As per the recent earnings, many of the large tier companies showed growth similar to the growth witnessed by them prior to the slowdown. However, in the case of mid tier companies, it is a mixed bag. The smaller companies were impacted more by the slower. Euro zone recovery, currency fluctuations, employee attrition and rising employee costs.

Stability of the Companies in IT-ITES industry

Global ratings agency Fitch has affirmed a stable outlook for the India information technology (IT) services sector in 2012 on account of its strong liquidity position, even though it warned that revenue growth of the segment may moderate this year. "Despite an expected moderation in revenue growth in 2012 from 2011 levels, the outlook for the Indian IT services sector is stable on the back of its strong liquidity position," Fitch said in its annual report, '2012 Outlook: Indian IT Services'. It further added: "The revenue growth may decline from a slowdown in the demand for IT services because of uncertainty regarding economic growth in the key markets of US and euro zone." According experts, the total Indian IT industry is worth over USD 70 billion. Fitch said that hiring by the IT services industry increased in 2011 in anticipation of improving demand in the sector and this resulted in higher wage costs and a negative impact on EBIDTA margins in the April-December period of 2011. "The moderation in revenue growth is likely to exert further margin pressures," the report said.

However, it added that recent weakening of the rupee against the US dollar is likely to provide some relief to the margins. "The depreciating Indian rupee, which lost around 15 per cent of its value against the US dollar in 2011, is likely to provide some relief to the margins over the short-term as about 60 per cent of Indian IT export contracts are US dollar-denominated. However, over the medium-term, some of the advantage may erode due to the increasing competition," Fitch said. Regarding the liquidity situation of the Indian IT services companies, Fitch said it would remain comfortable in 2012, backed by their high cash balances, low debt levels and positive free cash flows from the recurring and critical nature of IT services.

Success Story- Cognizant

Cognizant has achieved 45 per cent growth in the last quarter. Is it because of the low margin-high growth model opted for by the management? This definitely is a reason for our high growth but I don't want to categorise ours as a low margin business. We have deliberately kept the model this way. Our business is as profitable as, or more profitable than, our peers'. What we have told our investors is, anything in excess of 19-20 per cent will be invested back in the business so that we can hire high-calibre relationship managers and good partners. We can also invest in creating technology and domain capabilities and build industry specific solutions. The operating margin of 19-20 per cent is much lower than the other companies in business... The company's operating margin may be lower but anything in excess of 19-20 per cent is put back in the business. Overall, the profitability of the business is as good as anybody else's in the industry. When did Cognizant start thinking about implementing this model? This has been there from the beginning. We went public in 1998 and that is when we took the plan to the investors. During that time, many of the offshore players were operating with a margin anywhere between 28-32 per cent but the on-site consulting players were operating at 12-14 per cent margin. We felt that if we had to grow faster, we had to make a lot more of investment. That is what we told the investors; that at some point, the industry will converge around 19-20 per cent. And we really wanted to take the lead.

Downfall of Infosys
The company has seen "ramp down" in orders from various accounts and especially in the financial services sector, Chief Executive S.D. Shibulal said. The banking and financial service industry vertical contributed Rs. 3,037crore (out of a total revenue of Rs. 8,852 crore) to the companys revenues in the fourth quarter. The company expects profit margin in the quarter to end-June to be 200 basis points lower than in the quarter to end-March, its chief financial officer said. Margins would be hit by staff hiring charges and visa-related costs, V. Balakrishnan said. Infosys reported an EBIT margin of 29.9% in the fourth quarter against 31.18% in the third quarter. Contrary to speculation, Infosys gave a guidance for the current fiscal (FY13) but there was disappointment over the fact that growth is expected to be lower than most conservative estimate. Infosys has guided for 8-10% growth in dollar revenue terms against expectations of 12-15%. The company expects FY13 dollar revenues at $7553-7692 million. The FY13 earnings per share guidance is expected at Rs. 158.76-161.4 (at assumed currency rate of INR50.88/USD). The company's guidance is taken as a benchmark for the IT industry as a whole. The guidance for the full year is even below IT lobby Nasscom's forecast of 1114%. The company also missed its revenue guidance for the March quarter. Q4 sales were 5.7% lower than the guidance of Rs. 9,391-9,412 crore. The earnings per share stood at Rs. 40.54 per share against a guidance of Rs. 42.12 per share. The management sees headwinds from the US and Europe, which accounts for nearly 75% of revenue for Indian IT firms, going ahead. "The year ahead looks challenging for the IT services industry, with slow recovery in the global markets, said S. D. Shibulal, CEO and Managing Director. Major brokerages have turned negative on the stock. Barclays said the stock can have at least a 10% downside. Worldwide IT spending is forecast to increase 2.5 percent in 2012 from a year ago, research firm Gartner said on April 5, lower than its January forecast of 3.7 percent growth. The forecast cut is due to a strong U.S. dollar