Software Sector Analysis Report 

• The Indian IT-BPM industry, grew by 7.7% in FY17. India's share in the global sourcing market about 38% in FY17. However, the growth projection for FY18 is muted. The growth will be driven by new digital technologies while legacy businesses will be under pressure. The adoption of new digital technologies will bring huge disruption to the industry's traditional business model.
• Indian IT companies had a decent year in terms of financial performance, driven by factors like such as digitisation, and non-linear growth models. Indian IT firms continue to move up the value chain by providing more end-to-end solutions and engaging more closely with clients. The drive towards digital technologies, internal cost optimisation to improve profitability continued in FY17. The industry will not add employees in significant numbers. Digital revenues are expected to grow much faster than revenues from traditional services.
• India's IT industry can be divided into six main components, viz. Software Products, IT services, Engineering and R&D services, ITES/BPO (IT-enabled services/Business Process Outsourcing), Hardware, and e-commerce. Export revenues from IT services (US$ 66 billion) continues to drive growth. BPM accounted for 22.2% (about US$ 26 billion) of total IT exports of US$ 117 billion. Software products and engineering services contributes US$ 25 billion. The Indian IT sector will benefit significantly from the government's schemes like Digital India, Make in India, and Start Up India.
• The Indian software sector's value proposition is unmatched in the world. Entry level wages remain 8x-10x lower than in developed nations. The number of global delivery centers (GDC) have increased to more than 670 in FY17 in more than 78 countries. The digital skilled talent base is growing rapidly.
• Increasing competition, pressure on billing rates of traditional services and increasing commoditization of lower-end services are among the key reasons forcing the Indian software industry to make a fast move up in the software value chain. The new digital technologies like social media, mobility, analytics, and cloud computing (SMAC) has permanently changed the way Indian IT firms do business.
• The Indian government is emphasizing on better technology enabled delivery mechanisms for a multitude of government projects. Further, with the new digital India and start up Indian initiatives being launched, the domestic market for software services has a bright future ahead.

• Supply
• Abundant supply across segments, mainly lower-end, such as ADM. Lower supply in higher-end areas like IT/Business Consulting, but competition is very tough.
• Demand
• The global downturn had put considerable pressure on global IT spending but the situation has improved.
• Barriers to entry
• Low, particularly in the ADM & BPO segments as these are prone to relatively easy commoditization. It's high in value-added services like IT/Business Consulting and R&D where in-domain expertise creates a barrier. The size of a particular company/scalability and brand-image also creates barriers to entry; as such firms have built up long-term relationships with major clients.
• Competition
• Competition is global in nature and stretches across boundaries and geographies. It is expected to intensify due to the attempted replication of the Indian offshoring model by MNC IT majors as well as small startups.
• Substitution of IT services and products
• IT continues to be a driving force towards all aspects connected with our lives. While a particular technology may become obsolete and a particular company specializing in it may suffer, the obsolete technology can only get substituted by a newer technology offered by the same/different player in the IT/ITES industry.

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• The Indian IT/ITES industry earned revenue of over US$ 152.6 bn during FY17. Out of this, exports accounted about 76% of the industry's revenue.
• In terms of contribution by industry verticals, BFSI, Telecom/Hi-Tech, and Manufacturing are the most important at 53%, 18%, and 10% respectively.
• The USA accounts for about 62% of the export revenue followed by the UK and Continental Europe, with 17% and 11% respectively. Other regions such as Asia Pacific are catching up, with a contribution of 8%.
• In terms of IT services, at the end of FY17, India's market share stood at 52% and acquired about 38% of ITBPM sourcing globally in FY17.

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• As per NASSCOM, the Indian IT/ITES industry is expected to maintain a growth of 7%-9% in FY18. NASSCOM has also envisaged the Indian IT/ITES industry to achieve a revenue target of USD 350 billion by 2025.
• As the global sourcing industry continues to grow at high single digit rates. Indian IT companies continue to increase market share; the long-term industry outlook remains robust.
• Emerging protectionist policies in the developed world are expected to affect the Indian IT companies. Due to US restrictions on visas as well as rising visa costs, most Indian IT companies have subcontracted onsite jobs to local employees in the US and have begun hiring locals. This has adversely affected margins of Indian IT companies.
• Indian IT companies have adopted the global delivery model. They are setting up development centers in Latin America, South East Asia and Eastern European countries to take advantage of low cost and also cater to the local market. In the US, such centers will help mitigate the risks of the new immigration bill and increase the probability of winning projects in highly regulated sectors such as healthcare, government services, utilities etc.
• ADM services, which used to provide major chunk of revenues to the domestic IT players, has been severely affected due to the falling billing rates. Hence, the companies have venturing into high value services such as the new digital services. Large Indian companies like Infosys, TCS, Wipro, Tech Mahindra, HCL Technologies, and Mindtree will benefit the most from this trend.
• Billing rates are expected to remain under pressure due to commoditization of traditional services. Therefore, companies are expected to preserve their margins through effective cost containment measures like shifting more wore work offshore, improving employee utilisation and increasing the use of automation software.

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Related Links for Software Sector
Quarterly Results | Sector Quote | Over The Years