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Software Sector Analysis Report 

[Key Points | Financial Year '18 | Prospects | Sector Do's and dont's]

  • India's IT industry contributed around 7.9% to the country's GDP. The industry added around 1,05,000 jobs in FY18 and is expected to add over 100,000 jobs in FY19. IT industry is fueling the growth of startups in India, with the presence of more than 5,200 startups in India.
  • The IT sector in India expanded at a CAGR of 10.71% to US$ 167 billion in FY18 from US$ 74 billion in FY10. It is estimated that the size of the industry will grow to US$ 350 billion by 2025.
  • Indian IT companies had a decent year in terms of financial performance, driven by factors like such as digitisation, and non-linear growth models. 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 FY18.
  • 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. 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. India is the leading sourcing destination across the world, accounting for approximately 55% market share of the US$ 185-190 billion global services sourcing business in 2017-18. India acquired a share of around 38% in the overall Business Process Management (BPM) sourcing market.
  • 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.
  • India's highly qualified talent pool of technical graduates is one of the largest in the world, facilitating its emergence as a preferred destination for outsourcing, computer science/information technology accounts for the biggest chunk of India' fresh engineering talent pool, with more than 98% of the colleges offering this stream.

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 '18

  • The Indian IT/ITES industry earned revenue of US$ 167 billion during FY18. Out of this, exports accounted about 81% of the industry's revenue.
  • Business Process Management (BPM) segment contributed around 19.2% in Indian IT sector revenues. The total market size of this segment stood at US$ 32 billion during FY18.
  • 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%.
  • Export revenue of the IT industry grew to US$ 126 billion in FY18 from US$ 117 billion in FY17. It is further expected to increase 7-9% YoY, to US$ 135-137 billion in FY19.
  • Export of IT services has been the major contributor, accounting for 55.6% of total IT exports (including hardware) during FY18. ITeS and Software products accounted for 22.2% of total IT exports during FY18, respectively.

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Prospects

  • As per IBEF, the Indian IT industry is expected to maintain a growth of 7% - 9% in FY19. It also expects that the Indian IT industry is likely to achieve a revenue target of US$ 350 billion by 2025.
  • Technologies, such as telemedicine, health, remote monitoring solutions and clinical information systems, would continue to boost demand for IT service across the globe. IT sophistication in the utilities segment and the need for standardization of the process are expected to drive demand. Digitization of content and increased connectivity is leading to a rise in IT adoption by media.
  • 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 etc.
  • 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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