Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Indian IT - The opportunity beckons! - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Mar 21, 2006

    Indian IT - The opportunity beckons!

    The Indian software story is well and truly on. After going through turbulent times post the bursting of the 'tech bubble', the industry has roared back into contention and in FY05, grew at its fastest rate since the dot-com bust. Offshoring, as a trend, is well established. The very fact that the Accentures and the IBMs of the world are scaling up their own offshore delivery centres in India and other low cost destinations is the biggest vindication of the 'global delivery model'.

    Indian software and BPO exports touched US$ 17.2 bn in FY05 and are estimated to touch US$ 22.3 bn in FY06 as per projections by NASSCOM, the industry association. At a recent analysts' conference organised by Wipro, India's third-largest software company, various data points were shown. To substantiate, the total global IT and BPO spending was estimated at nearly US$ 1 trillion in 2005 as per the NASSCOM-McKinsey report published. Of this, the offshore potential is estimated at US$ 330 bn, out of which the actual amount offshored is a mere US$ 30 bn. This is a mere 3% of global IT and BPO spending and less than 10% of the offshore potential. Therefore, the scope for growth is significant, to say the least.

    Source: NASSCOM-McKinsey Report 2005

    As regards the opportunities ahead for India, the NASSCOM-McKinsey report envisages software and BPO exports to hit US$ 60 bn by FY10, a compounded annual growth rate (CAGR) of 28% over the five-year period. Software exports, which stood at US$ 12.0 bn in FY05, can grow to US$ 35 bn by that time frame, a CAGR of around 24%. BPO exports, on the other hand, have the potential to touch US$ 25 bn by FY10 (US$ 5.2 bn in FY05). In fact, through targeted efforts and expansion of the offshore market and offshorable functions, the total pie can grow by an additional US$ 20 bn to US$ 80 bn.

    Source: NASSCOM-McKinsey Report 2005

    While we would say that India could certainly achieve these targets, the country also faces certain risks that could spoil the party.

    1. The 'HR' factor - Undoubtedly, this is the biggest threat to India's leadership in the global offshore IT industry. The software industry is a people-intensive one, where quality and skilled human resources are always at a premium. Wage inflation at around 15% annually is very much a reality in this industry, given the fact that demand outpaces the supply. Therefore, attracting and retaining the right talent is the most important aspect for any software company.

      While the absolute number of engineers graduating in India is large, a much smaller proportion of them are actually 'employable', This explains as to why companies like Infosys, Wipro and even a mid-sized, niche player like Geometric Software, have set up their own training institutes. This, in our view, is the biggest issue that the industry is facing.

    2. MNC competition - As offshoring has become more and more mainstream, global technology companies such as Accenture and IBM have started to recognise the importance of having centres offshore. In fact, Indian software companies opine that the main reason for these companies going offshore is not because they themselves want to do it. It is more because of client directions! This clearly signifies that offshoring has made many global corporations more competitive and has literally forced the MNC companies to shift to this business model.

    3. Emergence of other low cost destinations - While India is the undisputed leader in the global offshore IT industry, its leadership could be threatened by the emergence of other offshoring destinations such as China, Eastern Europe and South East Asian countries. The low cost advantage may soon be frittered away. The major point to note is that the Indian majors will need to keep on moving up the value chain in order to build on the 'India advantage' platform. Moving to higher-end tasks, such as consulting and package implementation, is the only way to ensure a sustainable competitive advantage for Indian firms at the micro level and India as an offshoring destination at the macro level. Other factors like domestic infrastructure facilities will also influence the cost-benefit analysis going forward.

    We remain positive on the Indian software sector from a longer-term perspective. Offshoring as an industry is very much in the 'growth phase' and India is at the forefront of this trend. However, it would certainly be prudent to take into account the above-mentioned risk factors that are likely to impact the industry's growth. As should be the case with any investment, go for companies that are most likely to benefit from the 'offshoring wave' based on factors like management quality, track record of execution and ability to withstand difficult times in business.



    Equitymaster requests your view! Post a comment on "Indian IT - The opportunity beckons!". Click here!


    More Views on News

    Infosys: A Decent Start to FY18 (Quarterly Results Update - Detailed)

    Jul 14, 2017

    Infosys starts FY18 on an encouraging note with a stable performance.

    Infosys: A Flat End to FY17 (Quarterly Results Update - Detailed)

    Apr 13, 2017

    Infosys ends FY17 with a 7% QoQ fall in net profit for the March quarter.

    Infosys: A Decent Quarter (Quarterly Results Update - Detailed)

    Jan 13, 2017

    Infosys has reported a 0.2% QoQ decrease in the topline and an increase of 4.6% QoQ in the bottomline for the quarter ended December 2016.

    Tech Mahindra: Our Revised View (Quarterly Results Update - Detailed)

    Aug 2, 2017

    A better than expected turnaround in performance results in a change in view.

    Wipro: A Decent Start to the Year (Quarterly Results Update - Detailed)

    Jul 27, 2017

    Digital services drive growth for Wipro in 1QFY18.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    Proxy Plays: A Smart Way to Bet on 'Off Limits' Companies(The 5 Minute Wrapup)

    Aug 4, 2017

    The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 17, 2017 03:37 PM


    • Track your investment in INFOSYS LTD with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
    • Add To MyStocks


    Detailed Financial Information With Charts