Indian IT Industry June 2010 Review

Indian IT industry

June 2010 review (Jaypee)

1. IT companies consistently widening their services spectrum
2. They are rising up the value chain of IT services industry.
3. It offer services in:

a. IT consulting
b. Application development
c. Software product engineering
d. Enterprise System integration
e. Business Process Outsourcing
f. Testing Services
g. Re-engineering

4. BPO services are offered in

a. Finance
b. Customer Service
c. IT infra management
d. Analytics and Research
e. Risk Management
f. HR, Media and Legal Outsourcing

5. Since IT is still largely export driven, USD INR rate impacts the revenues.

Financials

1. Infosys is being valued at 22X at FY12 E, TCS at 21X and Wipro at 21X of FY12 E.
IT value chain

1. IT companies stated from Maintenance and support and then the transitions happened to ADM and now recently have tried foraying into IT consulting and re-engineering.
2. Consulting is a high margin business.
3. IT companies through bundling of their services get the IT and BPO projects together. With significant revenue now coming from BPO business, Indian IT companies are giving off a stiff competition to the pure play BPO Vendors like Genpact and WNS.

SWOT

Strength

1. Indian IT industry is a 50 bn USD industry.
2. Indian IT companies are now offering services at all points on the value chain. The big players offer integrated services hence they are able to get large projects.
3. Indian IT companies are strong in BFSI vertical and going forward the revenue from this vertical might increase as the spending in IT under this vertical increases.

Weakness

1. Consulting and research still contribute less to the total revenue however IT companies are trying to strengthen their consulting and research departments.

Opportunities

1. Hardly 100 of the top fortune 1000 companies do business in India. Hence there is a huge potential for outsourcing.
2. Indian IT market is only 5% of the global IT spend market. Opportunity to increase this pie.
3. With cost cutting coming into play the companies would most likely outsource for curtailing expenses.
4. Also the steady recovery in global scenario would improve the IT spends by companies.
5. Vendor consolidation would also help Indian IT companies to consolidate their positions.
6. The US healthcare bill is an opportunity for Indian IT companies.
7. Cloud computing is also a huge opportunity.
8. All big banks would be outsourcing in the near future.

Threats

1. Rising rupee would be the biggest threat
2. Off shoring to india advantage replicated by other countries would increase competition and put pressure on margins and billing rates.
3. US markets remain the biggest market for Indian IT industry. US govt. policies towards outsourcing if adverse would prohibit the growth.
4. Rising salary pressures put a downward pressure on the margins.

Other points

1. Forrester research expects the US IT industry to grow by 10% this year.
2. The consulting and system integration would grow at the fastest pace.
3. Nasscom predicts than Indian IT industry can grow at 25% CAGR for the next decade.
4. Nasscom predicts Indian IT industry can grow at 13-15% in FY11.
Application Development Maintenance (ADM) business was what drove the market the most till 2000. The Indian IT companies have stretched on the Upside of the value chain by getting into consulting and have stretched to the lower end of the value chain by providing the BPO services.
5. Cloud computing are finding place in the clients option list. It is internet based resource sharing, software sharing and information sharing service. Cloud is metaphor for internet. The data shared is accessed through a web browser.
6. The Rupee has been steadily rising given the huge FII inflows into the Indian market with our growth story intact. This may impact the IT export businesses adversely.
7. The domestic Indian IT market is growing and now stands at UDS 20 billion. This is going to grow more rapidly as the industries expand and economy grows steadily at 8%. IT services sector is expected to grow at 17% in the domestic Indian market.
8. Clients have been raising concerns with Indian IT vendors in relation to the Attrition rate which hampers the smooth completion of the project and Data security as the policies for it are not as stringent as they are prevalent in western countries. There have been past incidents of data thefts.
9. Testing services is high volume based and also cost sensitive , India has a huge opportunity in this domain. All major product engineering firm would require lost cost testing of their products in India. Eg. Google and Microsoft.
10. Offshore product development services also offer a huge scope for Indian IT industry. The product development market is expected to double by 2013. Engineering services are also expected to do well in the future. IT governance and Mobile Banking are other opportunities in this space.

There is an acquisition spree among Indian IT companies. The targets are BPO, mortgage, healthcare and insurance space.

New Opportunities

There is immense opportunity in the healthcare space. Cognizant has the largest healthcare and life-sciences practice practice which accounts for 26% of their total revenue.

UID budget has an IT budget of 600 cr. Taiwan which is the manufacturing hub might be another growth frontier opportunity for Indian IT companies.

Threat

The threat also comes from the fact that lot of international IT firms are setting up their offshore delivery centers in India. Global IT majors have low operating margins are better positioned to offer discounts to apply for the renewal of contracts expiring this year. The billing rate is expected to reduce due to competition in the outsourcing market.

One positive is large clients have started outsourcing large deals to multiple vendors. This is the area where Indian IT companies are steadily gaining market share.

The verticals

TCS is strong in the ADM, testing and BPO. The acquisition of Citibank BPO has helped TCS in this regard. Also BFSI as a Domain is highly profitable with TCS revenue higher than other Indian IT players.
Infosys is actively looking for acquisition in the healthcare space.
Usually in IT companies it is seen that do currency hedges typically two quarters in advance of their revenue.