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Software Sector Analysis Report 

[Key Points | Financial Year '16 | Prospects | Sector Do's and dont's]

  • The global IT sourcing grew by 9%-10% YoY in FY16. This was in stark contrast to the marginal de-growth of 0.2% YoY in total global IT spend. The Indian IT-BPM industry, grew by 9% in FY16 as per NASSCOM. India’s share in the global sourcing market is 56%. However, the growth projection for FY17 is muted. The growth will be driven by new digital technologies while legacy businesses will be under pressure. The adoption of new digital technologies will bring huge disruption to the industry’s traditional business model.
  • Indian IT companies had a decent 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 digital technologies, internal cost optimisation to improve profitability continued in FY16. The industry will not add employees in significant numbers. Digital revenues grew 1.5 times faster than revenues from traditional services.
  • 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 (US$ 61 billion) continues to drive growth. The IT services segment accounted for about US$ 75 bn of total revenues followed by BPM at US$ 28 bn, Engineering services at US$ 22 bn, e-commerce at US$ 16.7 bn, hardware at Rs 15.4 bn and Software Products at Rs 6.5 bn. The growth in e-commerce (19% YoY) was highest. 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 is 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 670 in FY16 in more than 78 countries. India’s skilled talent base grew by about 7% YoY in FY16 i.e. by 6.2 million. The digital skilled talent base was about 2,50,000 and growing rapidly.
  • 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) has permanently changed the way Indian IT firms do business.
  • The 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 has a bright future ahead.

How to Research the Software Sector (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 has improved.
  • 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.

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Financial Year '16

  • The Indian IT/ITES industry earned revenue of over US$ 163 bn during FY16. Out of this, exports accounted about 66% of the industry's reven
  • 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 FY16, India's share in the global outsourcing market stood at 56%.

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Prospects

  • As per NASSCOM, the Indian IT/ITES industry is expected to maintain a growth of 8-10% in FY2017. 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 at high single digit rates. Indian IT companies continue to increase market share; the long-term industry outlook 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 have subcontracted onsite jobs to local employees in the US and have begun hiring locals. This has adversely affected margins of Indian IT companies.
  • Indian IT companies have adopted 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 et
  • ADM services, which used to provide major chunk of revenues to the domestic IT players, has been severely affected due to the falling billing rates. Hence, the companies have venturing into 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 increasing the use of automation software.

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Related Links for Software Sector
Quarterly Results | Sector Quote | Over The Years

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