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Indian IT: The road ahead - Views on News from Equitymaster
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  • Mar 1, 2007

    Indian IT: The road ahead

    India has emerged as the fastest growing technology hub in the world, its growth dominated by IT software and services such as application development and maintenance, system integration, IT consulting, application management, infrastructure management, testing and web services. When it comes to IT services, the world is indeed coming to India's doorsteps! With a CAGR of 31% during the last 4 years, the Indian IT-ITES industry's contribution to GDP has risen from 1.2% during 1999-2000 to 5.4% in 2006-07 (Source: NASSCOM).

    What have been the main growth drivers of Indian IT Industry?
    According to NASSCOM, the growth in India's IT services exports has been led by many factors, including:

    • Strong demand and increased traction for traditional services like Application Development and Maintenance (ADM);

    • New services like EAI (Enterprise Application Integration) and package implementation;

    • New areas like engineering services;

    • Indian companies are enhancing their global service delivery capabilities through a combination of green-field initiatives, cross-border M&As, partnerships and alliances with local players;

    • Global software product giants such as Microsoft, Oracle and SAP have established their captive development centers in India;

    • Leading MNC IT companies have operations in India, accounting for 16% of their delivery capabilities in offshore locations, with India accounting for 70% of the total offshore employee base.

    Research and Development to be the coming years
    India is fast emerging as a research and development hub for some of the largest IT companies in the world. It is drawing 25% of fresh global investments in R&D centers. Multinationals have been tapping Indian talent for conducting cutting-edge research. Meanwhile, the companies are already betting big on India and many of them are lining up to invest in India, and a big chunk of their spending is directed towards setting up R&D facilities in the country. As per the data compiled by the Ministry of Communications and IT, against 28 companies that outlined their investment plans, 17 have already infused capital. Six of these companies have committed over US$ 1 billion each towards their India operations. This includes Cisco's commitment of US$ 1.1 bn, SemIndia's US$ 3 bn proposed investment, Intel's US$ 1.3 bn, Microsoft's US$ 1.7 bn, IBM's US$ 6 bn, and SAP Lab's US$ 1 bn investment.

    How does IT sector contribute to the Indian economy? The IT sector presently contributes to 5.4% of the GDP. Analysing further every rupee spent by the IT-ITeS sector on domestically sourced goods and services translates into a total output of Rs 2 in the economy and for every job that is created in this sector, 4 jobs are created in the rest of the economy. The IT-ITeS sector, which as per NASSCOM estimates is expected to generate exports worth US$ 60-75 bn in 2010, will contribute US$ 115 bn to the economy from other sectors. The industry is expected to create about 11 m jobs directly and indirectly over the next three years.

    IT Industry Sector wise breakup
    (US$ bn) FY 2004 FY 2005 FY 2006 FY 2007E
    IT Services 10.4 13.5 17.8 23.7
    -Exports 7.3 10 13.3 18.1
    -Domestic 3.1 3.5 4.5 5.6
    ITES-BPO 3.4 5.2 7.2 9.5
    -Exports 3.1 4.6 6.3 8.3
    -Domestic 0.3 0.6 0.9 1.2
    Engineering Services and R&D, Software Products 2.9 3.9 5.3 6.5
    -Exports 2.5 3.1 4 4.9
    -Domestic 0.4 0.8 1.3 1.6
    Total Software and Services Revenues 16.7 22.6 30.3 39.7
    Hardware 5 5.9 7 8.2
    Total IT Industry (including Hardware) 21.7 28.5 37.3 47.9
    Source: NASSCOM

    The road ahead
    India is up to meet the global IT challenge. According to NASSCOM projections, overall IT software and services industry will grow by 27% to 28% in FY07, clocking revenues of US$ 48 bn. IT-ITES exports are likely to grow by 35% YoY in FY07, posting revenues between US$ 27 bn. While the future holds strong growth prospects for companies across the tiers, we believe that execution capabilities and scalability will be the key challenges, especially for mid-size players. This is considering that companies across the board are reporting a severe talent crunch. And considering that competition (for business and people) is only going to intensify in the future, investors need to watch out carefully before committing their monies into IT stocks.



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