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IT Hardware: It's hard to ignore - Views on News from Equitymaster
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  • Sep 18, 2009

    IT Hardware: It's hard to ignore

    Software and services have become synonymous with the Indian IT sector. But wait, aren't we ignoring the hardware? Yes, it is ironic that the Indian IT sector that boasts of future super vendors like Infosys and TCS does not have many big brands to talk about in the hardware space. While the Indian IT software industry became the apple of everyone's eye, hardware remained the neglected child. This article talks about the hardware sector in India and the challenges and the potential it has in store.

    The IT hardware industry comprises of a plethora of products and accessories like desktops, notebooks, mobile computing devices, servers, storage, printing and imaging solutions, security and network devices. The domestic market for hardware is expected to grow at a compounded annual rate of 8.2% in the next 5 years. The Indian PC market (usage in homes, small and medium businesses, large businesses, government and education) stood at around 7 m in volume terms in 2009, and is expected to grow at a CAGR of 9.7% going ahead. The leading companies in the PC market are HP (28%), HCL Infosystems (16%), Dell (15%), Acer (12%) and Lenovo (11%) among others. HCL Infosystems leads in the commercial desktops space, with a market share of 15%.

    HCL Infosystems earns a special mention. It is one of the largest information and communication technology (ICT) company with its Indian operations generating revenues of around Rs 123.8 bn, next only to HP which generates around Rs 129 bn from India. Apart from hardware, HCL Infosystems also covers software, networking, telecom, education and security segments. The company bets on the fact that India is the world's fastest growing ICT market, expected to grow at 13% despite the slowdown (Source: IDC report).

    Some facts about the hardware industry:

    1. The Indian hardware sector grew at a CAGR of 21% over the last 5 years. Most of the business was India focused as domestic revenues grew at a CAGR of 23% during this period, while the share of hardware export revenues which is already miniscule, saw a 12% dip.

      Source: Nasscom Strategic Survey 2009

    2. The hardware could not keep up pace with the export-oriented IT software and services segment, which grew at a scorching rate of nearly 30% since the last 5 years. The Indian IT industry's total revenues touched US$ 72 bn with exports of around US$ 60 bn. The revenue of the Indian hardware segment remained subdued at US$ 12.1 bn.

    3. The hardware segment contributed around 17% to the overall IT industry revenue. Its share in overall revenues has seen a decline over the years, on account of the slow pace of growth in the domestic market which is its core area of focus. Nevertheless, the hardware market clocking revenues of US$ 12.1 bn accounted for nearly 50% of the overall domestic market for IT which stood at around US$ 24.3 bn during 2008.

    4. According to Nasscom estimates, the global spend on hardware is estimated to have grown by 4% YoY during 2008 from US$ 570 bn to US$ 594 bn. The software and services spend touched US$ 967 bn growing at 6.3% YoY during the same period. While even after recording a spectacular growth rate, Indian IT contributes only 2% to the global software and services market, the hardware exports remain a goose egg at US $ 0.3 bn.

    So, what has resulted in a lackadaisical growth in the hardware segment? The major miscreants are lack of availability of input raw-materials, government policy mood swings, double taxation, high interest rates, customs duties on capital goods, poor infrastructure, transit delays and increased costs. Apart from branded US hardware majors like HP etc, low cost producers like China have remained a major competition for the sector. But things are changing for good on many fronts lately.

    Major change in sentiment comes from the government's initiatives. The sector is lately relieved of the policy of duplication of service tax and other duties. Furthermore, the government's planned expenditure of over Rs 230 bn for better automation of e-governance projects will be the major impetus. Increasing Internet and telecom penetration is an added boost to the hardware sector.

    We believe that the hardware sector in India is bound to grow by leaps and bounds. Why? If we analyse the major growth drivers for the ICT sector and particularly hardware, India is indeed a strategic place. With tele-density of just 29%, a lot of scope lies in this segment. Growth in core sectors like telecom, energy, power, infrastructure, health and education is underway and the future looks promising for the hardware sector which will fuel all these initiatives. Though there are not many listed companies in this sector as of now, this industry seems to have a lot of potential. It is worth keeping an eye on.



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