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Software Sector Analysis Report

 
[Key Points | Financial Year '15 | Prospects | Sector Do's and Dont's]

  • The global IT sourcing grew by 9%-10% in FY15. This was 2x faster than the growth in total IT spend. Indian IT-BPM industry, grew by 13% in FY15 as per NASSCOM. The growth projection for FY16 is 12%-14%. The growth will be driven by new digital technologies. The adoption of these technologies will bring disruption to the industry’s traditional business model.

  • Indian IT companies had a good year in terms of financial performance, driven by factors like such as digitisation, and non-linear models, and the depreciation of the Indian rupee. Indian IT firms continue to move up the value chain by providing more end-to-end solutions and engaging more closely with clients. The drive towards internal cost optimisation to improve profitability gathered steam in FY15. The industry is unlikely to add employees in the same numbers as it did before.

  • India’s IT industry can be divided into six main components, viz. Software Products, IT services, Engineering and R&D services, ITES/BPO (IT-enabled services/Business Process Outsourcing), Hardware, and e-commerce. Export revenues continue to drive growth with IT Services. This accounts for about Rs 68 bn of total revenues followed by BPM at Rs 26 bn, Engineering services at Rs 18 bn, e-commerce at Rs 14 bn, hardware at Rs 14 bn and Software Products at Rs 6 bn. The growth in e-commerce (33% YoY) was unprecedented and has given a boost to the BPM industry. The Indian IT sector will benefit significantly from the government’s schemes like Digital India, Make in India, and Start Up India.

  • The Indian software sector’s value proposition remains unmatched in the world. Entry level wages remain 8x-10x lower than in developed nations. The number of global delivery centers (GDC) have increased to about 640 in FY15 in about 78 countries. About 27% of incremental GDCs were set up in India. India’s global market share grew to 55% by the end of FY15.

  • Increasing competition, pressure on billing rates of traditional services and increasing commoditization of lower-end services are among the key reasons forcing the Indian software industry to make a fast move up in the software value chain. The new digital technologies like social media, mobility, analytics, and cloud computing (SMAC) will permanently change the way Indian IT firms do business.

  • The new Indian government is emphasizing on better technology enabled delivery mechanisms for a multitude of government projects. Further, with the new digital India and start up Indian initiatives being launched, the domestic market for software services looks bright.


     Key Points


    Supply

    Abundant supply across segments, mainly lower-end, such as ADM. Lower supply in higher-end areas like IT/Business Consulting, but competition is very tough.

    Demand

    The global downturn had put considerable pressure on global IT spending but the situation is now improving.

    Barriers to entry

    Low, particularly in the ADM & BPO segments as these are prone to relatively easy commoditization. It’s high in value-added services like IT/Business Consulting and R&D where in-domain expertise creates a barrier. The size of a particular company/scalability and brand-image also creates barriers to entry; as such firms have built up long-term relationships with major clients.

    Competition

    Competition is global in nature and stretches across boundaries and geographies. It is expected to intensify due to the attempted replication of the Indian offshoring model by MNC IT majors as well as small startups.

    Substitution of IT services and products

    IT continues to be a driving force towards all aspects connected with our lives. While a particular technology may become obsolete and a particular company specializing in it may suffer, the obsolete technology can only get substituted by a newer technology offered by the same/different player in the IT/ITES industry.

    TOP

     Financial Year '15


  • The Indian IT/ITES industry earned revenue of over US$ 146 bn during FY15. Out of this, exports accounted about 67% of the industry’s revenue.

  • In terms of growth by industry verticals, BFSI, Telecom/Hi-Tech, Manufacturing, and Retail are the most important at 41%, 18%, 16%, and 10% shares respectively.

  • The USA accounts for about 62% of the export revenue followed by the UK and Continental Europe, with 17% and 11% respectively. Other regions such as Asia Pacific are catching up, with a contribution of 8%.

  • At the end of FY15, India’s share in the global outsourcing market stood at 55%.
    TOP

     Prospects


  • As per NASSCOM, the Indian IT/ITES industry is expected to maintain a growth of 12-14% in FY2016. NASSCOM has also envisaged the Indian IT/ITES industry to achieve a revenue target of USD 225 bn by 2020.

  • As the global sourcing industry continues to grow and as Indian IT companies continue to increase market share, outlook for the sector remains robust.

  • Emerging protectionist policies in the developed world are expected to affect the Indian IT companies. Due to US restrictions on visas as well as rising visa costs, most Indian IT companies are increasingly subcontracting onsite jobs to local employees in the US. This has adversely affected margins of Indian IT companies.

  • Indian IT companies are increasingly adopting the global delivery model. They are setting up development centers in Latin America, South East Asia and Eastern European countries to take advantage of low cost and also cater to the local market. In the US, such centers will help mitigate the risks of the new immigration bill and increase the probability of winning projects in highly regulated sectors such as healthcare, government services, utilities etc.

  • ADM services, which used to provide major chunk of revenues to the domestic IT players, are getting affected due to the falling billing rates. Hence, the companies are now venturing into new high value services such as the new digital services. Large Indian companies like Infosys, TCS, Wipro, Tech Mahindra, HCL Technologies, and Mindtree will benefit the most from this trend.

  • Billing rates are expected to remain under pressure due to commoditization of traditional services. Therefore, companies are expected to preserve their margins through effective cost containment measures like shifting more wore work offshore, improving employee utilisation and the increasing use of automation software.
    TOP
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