INDEX Overview I.T industry market characteristics Domestic I.T market General features of major players Industry attractiveness I.

T penetration sector wise deep down Regulations and government initiatives Challenges faced by the industry Trends in I.T industry Projected trends for the industry

OVERVIEW The I.T industry in India has today become a growth engine for the economy, contributing substantially to increases in the GDP, urban employment and exports, to achieve the vision of a ―young and resilient‖ Indian technology sector will play an important role in meeting the evolving needs of the Indian consumers. It is imperative that end user industries re–align their business models and continuously invest in new technologies to provide innovative value propositions to their customers. IT will also be a significant driver in the economic growth of our country due to its effect on increasing productivity and enabling innovation. With its growing influence on the economy, the Indian IT industry is expected to witness about 12 percent growth over the next four years, to reach a market size of about INR1.8 lakh crores by 2016. IT services and software products will lead this growth, due to an increase in IT adoption by companies, shift towards outsourcing and emergence of new technologies. IT adoption across end user industries is not the same—some sectors like banking, telecom and insurance have leveraged IT across their business functions, including the back–end organizational processes, customer facing activities and revenue generating initiatives, and are at an advanced stage in IT adoption. Sectors like education, healthcare, media and retail are relatively low IT spenders currently, but are expected to significantly increase their expenditure on this front in the future. The role of IT in organizations is expected to evolve from simply being ―order takers‖ to transformative ―business partners‖. Several domestic IT companies have built strong IT capabilities in the last decade and today boast of a marquee global client base. While traditional pricing advantage that IT providers enjoy in global markets may not be relevant for the domestic market, they now have the opportunity to play in value–added areas by serving as optimization agents and transformation partners and deliver value through process improvements and technology–led transformations. IT providers are attempting to understand the unique and evolving needs of Indian end user industries aiming to employ India–specific strategies for the domestic market. IT providers are developing the required partner network, applying multiple cost levers and adapting innovative commercial models to fully tap the Indian opportunity. The Government plays an important role in the IT market, both as a buyer and as a facilitator. In its role as a buyer, the Indian Government needs to catch up with the rest of the world on IT spending—it‘s IT spends as a percentage of GDP have been significantly lower than Governments for developed economies. In recent years, Government has taken the right steps in some areas for example, UID, education. Going forward, Government needs to focus on providing more IT–enabled citizen services, improving efficiencies in the public sector, investing in disruptive technologies, standardizing data, and promoting shared services. These initiatives will need to be supported by a strong execution and governance model to effectively leverage IT.

.T industry leverages to lure clients across the globe. The diagram below quantifies some parameters of why India is a preferred location for investors.T INDUSTRY MARKET CHARACTERSTICS The structure of the Indian I.T industry can be depicted as follows: In the current scenario ―advantage India‖ is what the I.I.

0 per cent of the total Indian IT-BPO exports during FY12. over 60 per cent of Indian IT-BPO exports during FY12 were absorbed by US. US has traditionally been the biggest importer of Indian IT exports. Non US-UK countries only accounted for 22.T industry serves numerous industries and verticals pan India and the major revenue is derived from the following sectors: BFSI is the key vertical that contributes the most to the I.Currently I. Demand from emerging countries is expected to show strong growth going forward. . resulting in a share of just over 40 per cent of the total IT-BPO exports from India.T industry. It accounted for export revenues of around USD28 billion during FY12.

5 percent.The market structure of the industry in India is fragmented between various national. India being the outsourcing destination of the world today. offers diverse products and services for both its domestic and international customers. . multinational and small sized players.T MARKET A comparison of India‘s IT spends with more developed economies shows that the India‘s overall IT spend as a percentage of GDP is less than 1 percent—significantly lower than the global average of 2. DOMESTIC I. This industry however is dominated by large sized players catering 36% share of the total industry revenue.

Demand for applications would also lead to increased demand for software support. Increase in IT adoption by companies. However. BPO companies are also increasingly being established in tier 2 and tier 3 cities to enable service providers to deliver the services at lower costs. .More developed economies typically spend more on IT and as Indian economy grows. This segment is expected to grow at a healthy rate as companies will outsource the setting up and maintenance of IT infrastructure to third–party providers. outsourcing of non– core business activities including new transformational IT deals in various industry sectors such as banking and telecom and emergence of new technologies such as cloud and data analytic would drive the future growth of IT services in India. which is expected to grow positively as a result of increasing IT adoption. driven by convergence of IT systems and solutions with business objectives and growing IT adoption to handle business complexities. The domestic IT services market is growing the fastest amongst all domestic IT segments.500 crores. Business Process Outsourcing: BPO is a relatively small market in India and a large part of it is captive. reducing software license fees and acceptance of pay–per–use model of software licensing. rapidly evolving technology landscape in the corporate sector and curiosity of companies to test attractiveness of emerging technologies and implement them in business processes. Hardware The total hardware market for the year is estimated to be around INR32. Application and Software Related Services: The market for commercial application and custom application services would be driven by the growth in demand for application software. accounting for almost 32 percent of the total IT market in India. Infrastructure Outsourcing: Infrastructure outsourcing is one of the biggest revenue–generating service lines in the domestic market. emergence of complex IT systems and the need to enable them to communicate with each other. increase in size and scale of companies. Greater IT spends lead to productivity improvement through process automation. incremental business on electronic medium and real time access to information. replacement / upgrading of legacy systems. IT spending is likely to increase significantly. driven by the following factors:    Increasing need for companies to focus on their core competencies and invest in their core activities due to intense competition High–end skills required for maintaining and upgrading the complex IT systems to match the industry best practices that will be more difficult to manage internally reduction and lean IT organizations IT Consulting: IT consulting is expected to grow at a robust rate. there is a new trend related to third–party transformational outsourcing relationships between customers and service providers. Infrastructure and Network Integration Services: Demand for infrastructure & network integration services would primarily be driven by a need for synergies in IT systems across the global operations of organizations.

The slower growth of the desktop PC segment shall be driven by the increasing demand for computing devices in education and the ongoing Government initiatives to increase the reach of IT. The use of application software is increasing due to multiple factors including replacement / upgrading of legacy systems. Application Development Software: The market for application development software is expected to grow at a healthy pace. virtualization and digitization is expected to drive the demand for servers and storage in future. The systems software market is more mature and developed. light weight. systems and devices. increasing IT adoption across industries. 3. 2. 3. accounting for around 18 percent of the domestic IT market.800 crores. Application Software: Some of the key examples of application software include enterprise software. The value chain of the industry in broad terms can be depicted as follows: . current technology and business trends such as adoption of disruptive technologies like cloud and mobility and growing business threats point toward a strong market potential for security software as well as system and network management software. System Infrastructure Software: This segment primarily comprises of systems software. testing and deployment of applications as well as emerging mobile applications. Software Products The total software products market for the year 2013 is estimated to be around INR17. with concerns for security and improved customer services. Personal Computers: Notebooks / tablets and desktops together comprise a major part of the IT hardware market. and portable computing devices. 1. However. Servers and Storage: Growing acceptance of cloud computing. accounting software.1. reducing licensing fees. the increasing demand for notebook / tablets will lead to a fall in the demand for desktop PCs. would drive companies to invest in these applications. It is expected that increasing investments by companies in expanding and upgrading their current IT infrastructure would lead to increased investments in network equipment by most of the end–user industries. Growing adoption of cloud computing and virtualization. and graphics software. office suites. leading providers will face some stiff competition from the growing presence of open–source software. security software and system and network management software. Network Equipment: Network equipment is another big revenue–generating segment in the overall hardware market. 2. However. However. and increasing acceptance of pay–per–use model (software as a service) for software licensing. primarily driven by the use of cloud leading to redefinition of methods of design. The market for notebooks / tablets is driven by the increasing demand for affordable.


So maybe they don‘t take debt. variable expenses are higher as compared to the fixed expenses. the Japanese yen and the euro. the British pound. Therefore the Degree of operating leverage is very low in IT industry.GENERAL FEATURES OF THE MAJOR PLAYERS IN INDIAN IT INDUSTRY We have analyzed three players in this industry. Most of their projects are funded through internal funds. Out of all the major players Infosys has a stable and consistent hedging strategy. Different companies follow different hedging proportions and strategies. Some companies like Infosys have only foreign currency. . The comparative analysis of the three companies depicts that the number of employees of TCS manages is far more as compared to HCL and Infosys. the US dollar.Infosys.602079776 In IT industry. TCS and HCL Technologies. TCS has a mix usage of options and forward contracts as hedging instruments. namely. DEGREE OF OPERATING LEVERAGE DOL (TCS) DOL (Infosys) 1. HCL has been reducing its debt over the years while Infosys is a zero debt company. Also their actual assets are human capital which cannot be acquired.T companies the major asset is the employees. And we have seen some trends across these players.170881945 0. DEBT TO EQUITY RATIO None of these companies have high debt to equity ratio. which makes the industry vulnerable to fluctuations of the Indian rupee against major global currencies. EMPLOYEE MANAGEMENT In I. TCS has a varied policy for hedging its currency risk. For HCL and Infosys also the employees are increasing but the percentage increase is not more than TCS which is the market leader. FOREIGN EXCHANGE IMPACT A majority of the business of Indian IT services players is transacted in foreign currencies. Market downturns have not affected the company as its continuously expanding its employee base for the past five years.

7 per cent in the previous year) COST DRIVERS According to CIMA.8 198. which is defined as employees resigning or retiring and does not include people who were fired.6 77 FY13 156.8 160.3 per cent (14.2 per cent a year earlier. The various are the major cost drivers identified in the I. 10.7 276.2 85 NO. lower from 12. Intranet Server Platforms Employee Hiring and Training PC Services and LAN/WAN Services Marketing & Advertising Costs Software Development Costs Other costs not identified explicitly .6 per cent of the workforce quit in FY13.9 143. ‗cost driver is any factor which causes a change in the cost of an activity.6 64.4 54. Internet.7 FY10 113. A cost driver is the unit of an activity that causes the change in activity's cost.300 250 200 150 100 50 0 INFOSYS TCS HCL TECHNOLOGIES FY09 104.Messaging.2 FY11 130. has a direct relation to the growth of the sector and India's GDP. At Tata Consultancy Services (TCS).T Industry are:        Communication Costs . IT industry is primarily driven by its employees.4 FY12 150 238. OF EMPLOYEES INFOSYS TCS HCL TECHNOLOGIES ATTRITION Attrition. Attrition at second-rung Infosys Ltd rose to 16.8 50.

and its skilled workforce. it accounted for 5.T PENETRATION – SECTOR WISE DEEP DIVE 1.India‘s appeal lies in its competitive labor costs.INDUSTRY ATTRACTIVENESS 1. with 30.T Adoption  INR 18. and in terms of value. the US invested the most in India. led by the UK and followed by Germany and France.2% of projects. this year only 5. Also. the country‘s weaknesses are its under-developed infrastructure and a restrictive operative environment. An attractive market with a challenging business environment . compared with 11% last year. as well as its improving telecommunications infrastructure. High expectations for 2020 – India is expected to be among the top three economies of the world in 2020. particularly for economic growth and manufacturing according to EY survey 2014 and 2012 results. Investors across the world recognize India‘s FDI potential. However. growing domestic consumption levels and a skilled workforce are helping India to strengthen its position in the global marketplace. I. lucrative domestic market. 2.5% of global FDI. Seven of the top 10 investors in India during 2007-12 were from Western Europe.India was the fourth-largest recipient of FDI in terms of projects started in 2012.500 crores IT spends in banking . 3. Between 2007 and 2012.2% of respondents expect India to be surpassed by competition from more dynamic countries. followed by Japan with 10.4%. BANKING Current I. Foreign investors also applaud its strong management and business education system. Strengths such as a burgeoning middle class. One of the top FDI destinations across industries.

300 crores IT spend in manufacturing.T Adoption   INR 15000 crores IT spend on telecom Large strategic outsourcing deals a norm in telecom 3.T service typically deals with infrastructure outsourcing and project development . adoption levels still low I.T Adoption   INR 12.2. MANUFACTURING Current I. TELECOM Current I.

liberalization of external trade.REGULATIONS & GOVERNMENT INITIATIVES Regulations After the economic reforms of 1991-92. The policy aims to increase revenues of IT and ITES industry from US$ 100 billion to . Government Initiatives FDI up to 100 per cent under the automatic route is allowed in Data processing. elimination of duties on imports of information technology products. The Government of India's move to do away with the mandatory requirement of 10 hectares of minimum land area for setting up an IT and ITeS special economic zones (SEZ) is expected to provide a major boost to the real estate and IT sector. Technical testing & Analysis services. Software supply services. The State has around 600 small. Business and management consultancy services. The major fiscal incentives provided by the Government of India have been for the Export Oriented Units (EOU). and Special Economic Zones (SEZ).000 professionals directly and nearly three times the number indirectly  The Cabinet has recently approved the National Policy on Information Technology 2012. medium and large IT firms employing over 80. Market Research Services. software development and computer consultancy services.37 million) to roll out citizen-centric services electronically across 19 districts including Kolkata  Kerala has set an ambitious target of becoming a cent per cent digital state in governance. Some of the major initiatives taken by the Government to promote IT and ITeS sector in India are:  The Government of West Bengal plans to spend Rs 41 crore (US$ 7. relaxation of controls on both inward and outward investments and foreign exchange and the fiscal measures taken by the Government of India and the individual State Governments specifically for IT and ITES have been major contributory factors for the sector to flourish in India and for the country to be able to acquire a dominant position in offshore services in the world. Software Technology Parks (STP).

and many times this can be challenging to provide at the price levels they demand. this cost consciousness translates into lower margins in India compared with the global market. workforce is available at relatively lower costs. Client Relationship Management is important The pattern of IT buying by Indian companies differs significantly from that observed in other countries. companies may eventually compromise on some key aspects of the implementation. making it challenging for IT providers to pitch the effectiveness of their solutions purely based on the cost advantage. staff. being late adopters of IT.  US$ 300 billion by 2020 and expand exports from US$ 69 billion to US$ 200 billion by 2020 The Government of India plans to set up 15 new laboratories for testing hardware and software products under public-private partnership (PPP) model The Ministry of Finance has issued a circular to chairmen of public sector banks and regional rural banks. companies start from a very low baseline of IT management capabilities and infrastructure. Process optimization and business transformation are what Indian companies need. to be able to accommodate costs within the allocated budget. and implement transformative business processes. build IT systems from scratch. They expect the providers to become business partners who will make up for the lack of internal IT capabilities. need to identify alternative value propositions for the domestic market. Indian companies are typically ―high touch clients‖ and prefer more hand holding from their vendors. Given the relatively inadequate internal capabilities. In order to control costs. For IT providers. that all payments to customers. in contrast with their counterparts in developed countries who have an established basic infrastructure. Indian companies are cost sensitive Several Indian companies still consider IT as a cost center. As a result. all at the same time. therefore. IT . prefer integrated deals and press for outcome–based pricing models. and not a driver for value addition and business growth. IT providers. Indian companies are late adopters of IT Indian companies. do not have historical investments in building IT capabilities for their businesses. IT providers. vendors and suppliers as well as disbursement of loans and payments towards investments should be made only through the electronic mode CHALLENGES FACED BY THE INDUSTRY In India. thus. companies tend to resort to hard negotiations. Due to this mindset. need to play an end– to–end role where they partner with clients to help adopt IT.

causing them to move southward. In order to mitigate this risk. the Japanese yen and the euro. Immigration regulations Most employees employed by Indian firms are Indian nationals. Indian firms have focused on providing application development and maintenance services. . demanding the same quality of delivery as promised by IT providers to foreign clients. they are quite discerning as buyers. in turn. Besides.g. thus.S immigration bill. Commoditization of these service-lines could adversely affect billing rates and. Concentration of service offerings Changes in the service mix can impact a company's overall performance. Expectation of high quality of delivery While Indian companies are late adopters of IT and cost sensitive. as well as ensure delivery on key aspects like cost. Traditionally. For a firm focused on a limited number of verticals. there is a gap between the end user companies‘ expectations in terms of delivery quality IT providers thus. they also need to ensure that they gradually move to higher-end service-lines such as package implementation and systems integration to command a higher price. namely. need to balance the expectation of high quality delivery with the price points demanded in the Indian market. Any change in immigration regulations by any particular country can adversely impact the revenues of the Indian IT firm e. need to possess strong account management capabilities with dedicated resources to be able to serve Indian clients effectively. A fall in billing rates may adversely impact revenues. Risk associated with exchange rate fluctuations A majority of the business of Indian IT services players is transacted in foreign currencies. Currently industry is too much dependent on BFSI sector. Put simply. or structural changes that the industry goes through may adversely affect its revenues.providers. revenues. the infamous U. and quality of service. the US dollar. a downturn in any of those verticals. firms need to ensure that they operate in a variety of service-lines. The ability of IT professionals to work in other countries depends upon the necessary visas and work permits that they need to acquire. which makes the industry vulnerable to fluctuations of the Indian rupee against major global currencies. while majority of their clients are US-based. A proportion of services offered to clients‘ needs to be performed on site. the British pound. Concentration of verticals Verticals refer to various industries from which a firm derives its revenues. They expect vendors to assign quality resources for their projects. schedule. Billing rate risks Billing rate risks refer to the potential danger of clients renegotiating billing rates.

Broad Skill set gap Out of around 0. . many players are taking up projects in the Indian market for various reasons.5% of the unorganized workforce reportedly undergoes formal skill development. system integration.4 million engineering students graduating every year in India. Barely 2. testing and infrastructure management services (IMS). projects offered in the domestic space require end-to-end IT implementation encompassing consulting. Competency building Many times. to date. system integration and infrastructure management services and continue to lose out to global players. the country is expected to face a shortage of 13 million mediumskilled workers. only 20% are readily employable.T INDUSTRY Players focus on domestic market for strategic reasons Although the domestic market is not as profitable as exports. vendors use the experience gained from executing a project in the domestic market in a bigger project to be executed for a developed market. which lacks any kind of formal skill development system. Competency building and competitive advantage are the two most important reasons among those. Such contracts provide ample opportunities to Indian IT service providers to develop their capabilities and win clients abroad. vis-à-vis 11% in the organized sector. TRENDS IN I. Around 93% of the Indian workforce is employed in the unorganized or informal sector. implementation. In contrast. Domestic projects involve delivery of end-to-end solutions Indian IT players. have been unable to establish themselves successfully in high-end IT consulting. posing a big impediment to labor-intensive sectors. By 2020.

the company doubled its SMB customer base. standardizing and shared risk-reward improve project viability.Cloud to gain traction across SMEs Cloud services (Iaas and PaaS) are also on rise as these services are offered using pay-per-use model. In the last two quarters of FY11. SEZ‘s and Tier II & Tier III cities are projected to be the most revenue generating sources for the IT sector in the future because of the following advantages: . CRISIL Research believes that cloud services would result in significant uptake of IT by SMEs. Small and medium businesses Wipro is offering cloud services to SMBs in an attempt to become the largest IT vendor in the domestic market. The sectors in ROJECTED TR focus are: PROJECTED TRENDS FOR THE INDUSTRY STPI‘s.T by the government The government is taking numerous initiatives across various segments thus increasing the expenditure and adoption. Subcontracting. Increased adoption of I. TCS iON has garnered 235 customers in the domestic market.

PARAMETERS Term Fiscal benefits STPI‘S 10 years •100 per cent tax holiday on export profits SEZ‘S 15 years •100 per cent tax holiday on exports for first five years •Exemption from excise duties •Exemption from excise duties and customs and customs Location and size restrictions •No location constraints •23 per cent STPI units in tier II and III cities •Restricted to prescribed zones with a minimum area of 25 acres Further trends in the Tier II & Tier III cities have been pretty encouraging as depicted by the following facts which is driving big MNC‘s as well as Indian companies to these more profitable locations: 1. continental Europe and Japan have IT spending of over USD183 billion but contribute only 12 per cent of India‘s IT revenues. India has the potential to have a surplus of around 47 million skilled workers through its skill development program. The cost in newer cities is expected to be less than 28% than the leading cities 3. Jaipur is emerging as an I. 5. Some cities are expected to emerge as regional hubs for the large domestic companies. Redefining Boundaries The major revenue of Indian I.T delivery locations 2. India is expected to have the largest workforce in the world by 2025. 43 Tier II/III cities are emerging as I. with around 2 billion English-speaking people by the end of 2020.K majorly.S and U.T industry is presently concentrated from U. BRIC nations. The need of the hour is to focus on these . Within the same period.T city with exports of over USD 64 million in FY10. Over 50 cities have the basic infrastructure and human resource to support the global sourcing and business servicing industry. 4. while across the world are expected to witness a shortage of around 56.5 million skilled workers (Source NSDC).

Opportunities for I. Further adoption of technology and outsourcing is expected to make Asian nations like Singapore.T are:      Patient management. While the reach of the Government–managed public healthcare network is higher. MEDIA This sector is approximately INR 700 billion in revenues and is expected to grow at 15% per annum till 2016. 40 percent revenue of this industry comes from advertisements. Philippines etc. national chains.kiosks at hospitals Clinical layer.disease management software. Primary Health Centers (PHCs) and Community Health Centers (CHCs).diverse geographies to reduce dependence on the western powers and become self-sufficient. media and utilities have IT spend of over USD587 billion but constitute only 20 per cent of India‘s IT revenues. The private sector is a mix of specialty hospitals. independent hospitals and small clinics / nursing homes. Redefining Verticals Over 85 per cent of the total Indian IT-BPO exports is across four sectors viz. which is the area to be tapped by I. The public healthcare system mainly consists of district hospitals. private institutions have a larger share (approximately 60 percent) in terms of the total number of institutions. Public sector. manufacturing and retail. healthcare. PACS. telecom.T industry. electronic medical records etc. The following are the sectors to be focused on moving forward. BFSI. The opportunities are:   Analytics and business intelligence for targeted marketing. dynamic pricing and market research to use viewer feedback Increased need for social media and mobile based applications to increase reach and revenues HEALTHCARE The healthcare market in India is estimated to be INR 300 billion. the second largest IT market. BI Hospital Information Exchanges(HIE) Telemedicine & E-prescription . Systems like Virtualization.