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The next frontier for Indian IT companies - Views on News from Equitymaster
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The next frontier for Indian IT companies
Oct 1, 2009

The Indian IT story has become an epitome of success in the global IT services and BPO markets. We surely feel proud of this feat achieved by our home-grown IT mega-vendors. But in all this gung-ho, there is an important opportunity area that most of them have ignored. Infosys and TCS derive less that 3% or 4% of their revenues from this business. Wipro is a little better off with over 10% contribution from the same. We are talking about IT products, a segment that has so far eluded the Indian IT industry. IT products in layman terms are softwares ranging from word processers like MS Office suite to complex systems supporting business processes in areas like banking, telecom and even robotics. This article explores what has contained India from making a mark on the global product market. It also tries to highlight the opportunity that lies ahead.

Status quo of the Indian IT product industry
According to a study conducted by Nasscom and IT outsourcing advisory Zinnov Management Consultants, India's software product business revenue grew at an average annual rate of 44% from US$ 0.7 bn in FY06 to US$ 1.4 bn by FY08. The total revenue for Indian IT industry stood at US$ 72 for FY09, and thereby contribution of IT products has been miniscule.

Further, a peek into the IT product arena shows that Oracle Financial Services (OFS), TCS, Infosys, 3i Infotech, Subex, Cranes, Tally, Polaris, Nucleus Software and Ramco are the top 10 companies which have a percentage share of around 85% of India's IT product revenue. It is estimated that during the last 7 years, India saw over 400 software product startups in the areas of application softwares, telecom, banking, business intelligence, engineering applications and security domains.

Major achievers worth mentioning among these are OFS (Flexcube core banking solution), Infosys (Finacle core banking solution), Subex (telecom softwares) and Tally (accounting software).

Opportunities and threats
So are the Indian IT firms incapable of producing world-class products? Or are the Indian software products inferior? We doubt. Even Nasscom claims that there are Indian products similar to nearly all the IT products sold in the marketplace. What is more, it suggests that at times, Indian software products have better features than their international counterparts and are also priced lower. What is lacking is the proper brand image and go-to-market strategy. While India is a reputed name in the IT services domain, the 'Made in India' tag has still to gain acceptance in the software product arena.

The major challenges that India faces in global technology IP creation market are:

  • Smaller domestic market
  • Shortage of experienced product development talent
  • Lack of funding for software product development as it is riskier
  • Lack of distribution channels and product marketing expertise
  • Sky high entry barriers due to global giants like Microsoft and Adobe
  • Dominance of Indian IT outsourcing story

Nevertheless, the situations appears to be improving significantly with the development of talent pool and market coupled with the availability of venture capital as well as role models to give financial and mental encouragement. IT product development is increasingly becoming easier with the advent of technological innovation, newer delivery mechanisms and revenue models. The licensing model for product delivery has given way to software as a service model which allows clients to pay as per usage cutting back operational costs for small product developers.

The opportunity in this space is huge. Software products form the fastest-growing segment of the US$ 1.3 trillion global IT industry. Nasscom and Zinnov expect that by the end of 2015, sales of software products are expected to increase from US$ 294 bn at present to US$ 537 bn. The Indian software product business will have a total addressable market opportunity of US$ 290 bn to US$ 315 bn. A whale of an opportunity so to say! Most of this business is expected to come from banking and financial services, telecom, business intelligence and analytics domains in the global markets, and retail, mobile applications and online gaming in the domestic markets.

We accept that making inroads in the global product markets might take a little while especially for small and medium sized Indian IT companies. But we believe that the domestic market for IT growing by leaps and bounds offers ample room for Indian IT products to gather critical mass.

There is no fear of being cannibalised by the product giants of the west as lack of localization, lack of remote support, high cost of sale to Indian businesses and complex distribution channels act as strong enough entry barriers for MNCs eyeing Indian markets.

It is also worth noting that by the very nature of the product business, the growth is usually non-linear as the same product once deployed can fetch increasing amount of revenue through licenses and subscription. The developer just has to ramp-up efforts in order to add functionality. This is unlike IT services business model where more revenues mandate more capacity in terms of headcounts etc.

What to expect?
To conclude, we believe that IT products is a segment which will gain utmost importance within the Indian IT industry as the IT services see challenges from other low-cost nations like China, and Philippines. The market trend will also mandate IT service providers to provide end-to-end solutions comprising of well-diversified products and services portfolio.

Believing that some Indian IT companies are armed with the capabilities of becoming tomorrow's Microsofts and Adobes, we suggest investors to keenly watch this space. It might take a little while however.

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