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Software: Industry update - Views on News from Equitymaster
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Software: Industry update
Aug 10, 2007

Technology is a rapidly changing industry. In the era of convergence, we find many softwares ‘talking’ to each other, one getting outdated and other coming in. In order to tackle technological changes, companies have to be on their toes to sustain the market demand. From this month onwards, we will update our subscribers on the happenings in the technology industry on a quarterly basis. The exports to the US and UK make up 67% and 17% respectively of the Indian IT services exports. Banking, financial services and insurance (BFSI) and technology (high tech and telecom) are the main IT verticals accounting for nearly 60% of total exports (Source: NASSCOM). Manufacturing retail, media, utilities, healthcare and transportation that are rapidly growing verticals follow this. Tier-1 IT companies generate almost 60% to 65% of their revenues from these two verticals. Here is what is in store for the quarter ahead for BFSI and Telecom.

Banking, Financial Services & Insurance (BFSI) As per the NASSCOM, the highest average IT spending for FY07 was for the BFSI vertical followed by for the Energy and Utility segments. The rate of increase in the average spending in each of these verticals was expected to be in the range of 12% to 27%, making them the most likely highest spending sectors throughout FY08 as well.

In the short run, the main concern will be the sub-prime issue in US and subsequent IT spending in this vertical. But the point to be noted is that the Tier 1 IT companies derive a very small part of their revenues from the direct sub-prime segment. So in a way, this fallout is not going to be severe at least in the short run.

On the contrary, most IT companies are ramping up their activities in this space and major like TCS, Infosys, Wipro and Satyam recorded a QoQ growth of 13%, 5%, 9% and 6% respectively in 1QFY08 in their BFSI revenues. Moreover, the highest volume growth was seen in this vertical among all others.

Telecom
Telecom is a highly specialised area and has very few companies actively involved. Because of high entry barriers (mainly due to requirement of vendor approval) the fastest growth has been seen in this vertical over the past two years. As a result, only Tier 1 companies are actively involved in it.

In 1QFY08, telecom recorded the highest QoQ growth for TCS and Wipro. Across the US market, there has been a rise in telecom IT spending in the month of July 2007 and we believe that this will continue in the coming months.

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