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Software Sector Analysis Report 

[Key Points | Financial Year '19 | Prospects | Sector Do's and dont's]

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  • 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.
  • 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.
  • India's highly qualified talent pool of technical graduates is one of the largest in the world and the country has a low-cost advantage by being 5-6 times inexpensive than US. India is the second-fastest digitizing economy amongst 17 leading economies of the world.
  • Since every business is becoming software defined and technology led business models are emerging in every vertical, the technology investment is more than ever business outcome aligned and would be sustained through economic cycles.
  • Leading Indian IT firms like Infosys, Wipro, TCS and Tech Mahindra, are diversifying their offerings and showcasing leading ideas in blockchain, artificial intelligence to clients using innovation hubs, research and development centres, in order to create differentiated offerings.
  • 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 '19

  • India's IT & ITeS industry grew to US$ 181 billion in 2018-19. Exports from the industry increased to US$ 137 billion in FY19 while domestic revenues (including hardware) advanced to US$ 44 billion.
  • Export revenue from digital segment forms about 20% of the industry's total export revenue. India's IT industry contributed around 7.7% to the country's GDP and is expected to contribute 10% of India's GDP by 2025. The export sector crossed US$ 137 billion of revenues and marginally grew at the rate of 7-9% in FY19.
  • The Government of India has extended tax holidays to the IT sector for software technology parks of India (STPI) and Special Economic Zones (SEZs). As of May 2019, there were 273 approved SEZs across the country out of which 136 are exporting SEZs.
  • The computer software and hardware sector in India attracted cumulative Foreign Direct Investment (FDI) inflows worth US$ 37.2 billion between April 2000 and March 2019 and ranks second in inflow of FDI, as per data released by the Department for Promotion of Industry and Internal Trade (DPIIT).
  • The trend of growth of exports and imports was different in 2018-19 in rupee and US dollar terms. While growth of both export and import declined in US$ terms, it increased in rupee terms (at current prices) in 2018-19. This happened due to the depreciation of rupee vis-a vis US dollar in 2018-19.

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Prospects

  • The Government of India has extended tax holidays to the IT sector for software technology parks of India (STPI) and Special Economic Zones (SEZs). Further, the country is providing procedural ease and single window clearance for setting up facilities.
  • Also, the government has identified Information Technology as one of the 12 champion service sectors for which an action plan is being developed. It is setting up a US$ 745.8 million fund for realizing the potential of these champion service sectors.
  • While new technologies and digital transformation spends are growing at a healthy mid-teens CAGR, traditional products & services will grow at low single digits and is still four fifths of the enterprise IT spend. Because of this, we continue to see opportunities in both spend patterns for service providers who possess a comprehensive suite of offerings. Many transformational opportunities have the potential to convert large traditional spend into new age technology spend over the next few years.
  • There is a continuing shift in market buying patterns with “As a Service” Outsourcing growing thrice compared to traditional sourcing growing in high single digits. 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.
  • Revenue from digital segment is expected to comprise 38% of the forecasted US$ 350 billion industry revenue by 2025. The cloud market in India is expected to grow three-fold to US$ 7.1 billion by 2022 with the help of Growing adoption of Big Data, analytics, artificial intelligence and Internet of Things (IoT), according to Cloud Next Wave of Growth in India report.

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

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Feb 19, 2020 01:19 PM

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