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Industry Analysis IT and ITES:

Industry Analysis IT and ITES Abhinav Bahuguna 12001 Akshaya Ramdas 12007 Aleesha Ranjit 12008 Amruta Narkar 12058 Rohit Kumar 12041 Titus Raju 12053 1

Topics to be covered:

Topics to be covered Size of Indian IT /ITeS Industry Market Overview Features of the Indian IT/ITeS Industry Segmentation Growth in ITeS-BPO IT/ITeS Sector Moving up the Value Chain Porter’s 5 forces model and SWOT Analysis Software Development Life Cycle Global Comparison Value Addition at Competitive Costs 2 Mergers and Acquisitions Key Events Policy Typical Organizational Structure Major Players Financial Ratios Internal Analysis of Companies Knowledge Process Outsourcing – Growth Driver for ITeS Sector Future Trends Conclusion and Group’s Point of View References

Size of Indian Software Industry:

Size of Indian Software Industry 3 Source: CMIE, April 2009

Market overview:

Market overview IT/ ITeS Industry is on a Steady Growth Track. The CAGR over last 10 years is 28%. Industry revenues at US$ 47.8 billion for 2006-07; an increase of nearly 28% over 2005-06 • Exports revenue at US$ 31.9 billion in 2006-07; growing at about 33% over 2005-06 • Size of the domestic market at US$ 15.9 billion in 2006-07, a growth of 21% over 2005-06 • Domestic market breaking-out of hardware linked growth; e- Governance initiatives to boost domestic revenues Sector has reached US$ 64.5 billion in 2009. 4

Features of the Indian IT/ITeS Industry:

Features of the Indian IT/ ITeS Industry • Indian IT/ ITeS sector has matured considerably with its - expansion into varied verticals - well differentiated service offerings - increasing geographic penetration • India’s importance among emerging economies, both as a supply and demand center, is fuelling further growth of the sector • Continues to be one of the fastest growing industries in India, while India maintains its position as a strategic off-shoring destination for MNCs worldwide • IT/ ITeS sector contributed over 5.4% of India’s GDP in 2006-07, an increase from 4.8% in 2005-06 5

IT/ITeS Industry in numbers:

IT/ITeS Industry in numbers 6

SEGMENTATION:

SEGMENTATION 7

PowerPoint Presentation:

• The Banking, Financial Services & Insurance (BFSI) vertical continues to account for largest share of exports at 38%. • Telecom vertical accounts for second largest share of the pie at 20%. • Other verticals such as manufacturing, retail, media and healthcare are rapidly picking up pace. 8

Growth in ITeS-BPO :

Growth in ITeS-BPO •Sector has reached US $14.8 billion in 2008-09, an increase of 18.2 percent over the previous year. • Concept of outsourcing is increasingly gaining acceptance in the more conservative markets around the world 9

PowerPoint Presentation:

• Industry has graduated to a high proportion of voice-based services and a wide range of back-office processing activities. • Scope of services has evolved in the last 3-4 years, expanding to include increasingly complex processes involving rule-based decision making and research services requiring informed individual judgment. 10

PAT / Income Trends of Indian IT Companies:

PAT / Income Trends of Indian IT Companies 11 Source: CMIE, April 2009

PAT / Income Trends of Indian ITeS Companies:

PAT / Income Trends of Indian ITeS Companies 12 Source: CMIE, April 2009

PowerPoint Presentation:

IT/ITeS Sector Moving up the Value Chain 13

Critical Success Factors for IT Boom in India:

Critical Success Factors for IT Boom in India The Role Government of India in providing impetus to promotion of software exports. venture financing to India’s information technology sector has grown dramatically in the last year its low cost -high quality-scalability model, which gives it an edge over other emerging ITES-BPO destinations such as Ireland, the Philippines, China and some Latin American countries. high quality, pool of knowledge workers who have English Speaking and relevant domain skills give India an edge over other offshore outsourcing locations The ability to focus on core competencies and use off-shoring to access new technologies. ability to undertake offshore software development through data com links, availability of local enterprise and skills. 14

PowerPoint Presentation:

Bargaining Power of Customers: Large number of IT players vying for projects. Huge decline in IT expenditure. For existing products and services client continue with old companies. Barriers to Entry: Low Capital Requirements. Large Value Chain , space for small enterprises. MNCs are ramping up capacity and employee strength. Bargaining Power of supplier: Slowdown, job-cuts, layoffs. Availability of vast talent pool. Rivalry among firms: Commoditized offerings. High Industry Growth. Strong Competitors – few number of large companies. Threat of Substitute: Other Offshore Location : Eastern Europe, Philippines, and China. Price : Major differentiator, as quality is same. Very High Medium Shift from High to Low Low Porter’s 5 forces model: Indian IT industry 15

SWOT Analysis:

SWOT Analysis 16 Strengths Cost Advantages Breadth of service offering Ease of scalability Quality and maturity of process Global 24/7 delivery capability Weaknesses Excessive dependence on USA for revenues Excessive dependence on BFSI sector for revenues High rate of attrition Decreasing competitive advantage Opportunities Product innovation High end consulting work Domestic demand Scope to service sectors such as Transportation, Infrastructure Better corporate governance Threats Prolonging of Global economic slowdown US Govt. against outsourcing Shrinking margin due to rising wage inflation Increased competition from Foreign players like Accenture, IBM Increased competition from low wage countries like China, Indonesia

Software Development Life Cycle:

17 Software Development Life Cycle

Global Comparison:

Global Comparison 18 Countries Strengths Weakness Opportunities Threats Potential India Cost Competitiveness Large skilled labour pool Superior service maturity Government support Favourable time zone Good track record in IT Infrastructure Geographical diversification Moving up the value chain Manpower shortage Emerging low cost nations Rising wage costs and attrition rates High China Superior Infrastructure Cost competitiveness Large skilled labour pool Government Support Low service maturity Lack of English- language capabilities Weaker project management capabilities than India Lack of good quality record in software Limited ITES experience Complicated legal structure, IPR problem, lack of standards Penetration into Japanese and Asian market Non- voice services Emerging low cost nations Rising wage costs and attrition rates Moderate Philippines Skilled English speaking, educated workforce Cultural similarities with US Improved telecom infrastructure Us compatible legal and tax structure Sizeable presence in call centers, medical transcription, animation Political instability Smaller and more cotlier workforce than in India Lack of quality record in software Increased presence in call centres Moving up the value chain Emerging low cost nations Rising wage costs and attrition rates Moderate Ireland Established brand quality English Speaking, Educated workforce Cultural Similarities Stable Political and business environment Proximity to the EU High labour cost Shortage of labour Migrated to higher value- added activities High end niches Low cost competition from Eastern Europe Low

Value Addition at Competitive Costs:

Value Addition at Competitive Costs Cost of Operation • Amongst the top 5 global services locations, India maintains a substantive lead with respect to the financial attractiveness index. • Sourcing from India is estimated to deliver cost savings in the range of 25 – 60% for MNCs. • Cost of an engineer is about 20 – 40%, S&A about 80% and offshore billing rates about 50 – 70% lower than costs in EU. • Average offshore billing rate at US$ 20 – 35 per hour is about 50 – 70% lower than EU. • Apart from lower administration and labor costs, the central and state governments offer fiscal and non-fiscal incentives to industry players further adding to the cost advantage. 19

PowerPoint Presentation:

• Companies aggressively investing on innovation and R&D to differentiate their service offerings. • Change Management and Process Consulting services are increasingly becoming part of the end-to-end service requirements of clients. • R&D divisions of various MNCs being set up in India; number of patents and licenses being filed from Indian firms increasing rapidly. 20 Value Addition at Competitive Costs HP, Microsoft, Cisco, Oracle, Motorola and Qualcomm are some of the leading IT giants who have set up their R&D centers in India, with aggressive expansion plans in the pipeline.

Mergers and Acquisitions:

Mergers and Acquisitions IT companies undertake mergers and acquisitions for entering into new markets and enhancing their revenues and generating tax gains. IT industry witnessed a robust 119 acquisitions, totaling to Rs. 2,817.6 crore in 2007-08. The pace of mergers and acquisitions has slowed down which is largely on account of the economic slowdown witnessed by the major markets , the US and the Europe. The cash rich IT companies are going slow on acquiring companies overseas to conserve cash in turbulent times. 21

Mergers and Acquisitions:

Mergers and Acquisitions Caritor acquired Keane in an $854 million deal. Acquisition of 52% stake in Mphasis by EDS. Acquisition of Kanbay by Capgemini in 2007. Wipro bought US based InfoCrossing for a sum of nearly $600 million (close to INR 2400 crores). Wipro acquired BPO player Spectramind, to expand into the BPO space. Wipro acquired GE Medical Systems Information Technology (India) to leverage its specialization in the health science domain Nervewire by Wipro Citisoft by erstwhile Satyam (now Mahindra Satyam) The Polaris-OrbiTech merger 22

Mergers and Acquisitions:

Mergers and Acquisitions HCL Technologies acquired 90 percent stake in the Apollo Contact Center in Belfast of BT Group. The deal helped HCL to bag business from the London-based BT, including a $160 million order for setting up a BPO operation for BT in India. HCL Technologies acquired UK-based SAP Consulting company Axon Group PLC in an all cash deal for GBP 440 million. It gave a company strong foothold in the UK market and helped in expanding its footprint in the SAP implementation area. Acquisition of Mantas Inc, a US Corporation, by a leading Indian Software Product Company I-Flex Solutions Ltd. for USD 122.6 million. In December 2008, TCS acquired the captive BPO business of Citigroup- Citigroup Global Services (CGSL) for all cash deal of USD 505 million. 23

KEY EVENTS :

KEY EVENTS IT 1968: The Tata industrial conglomerate forms software services unit Tata Consultancy Services. Mid-1970s: IBM exits India. Wipro starts to create India's first homegrown PC. 1994: Telecom liberalized. 1995: TCS determines that its CasePac tool developed for IBM can be used to scan software for Y2K problems. An industry is born. 1999: Y2K contracts pile into India. 2002: Indian companies expand hiring. Massive layoffs in US 2003: Led by service conglomerates such as Wipro and Infosys, India becomes a primary destination for offshore outsourcing as foreign companies seek to lower cost. ITES First Phase : MNCs establishing units in India (Pre 1997) Second Phase : Entry of established software co. (1997 – 2002) Third Phase : Geographical dispersion of Activities (2002-2004) Fourth Phase : Move towards acquisitions ( 2004 - ) 24

POLICY:

POLICY Government Initiatives and Progressive Policy Reforms: Establishment of a Nodal Agency (STPI) Software Technology Parks of India (STPI) was set up to provide: • Fiscal benefits like tax holidays to attract investment into the industry • Basic Infrastructure • Single – window clearances for setting up Export Oriented Units • Virtual model allows firms to avail benefits without restrictions on location Recent / Current Initiatives • Area limit exemptions for the IT-BPO sector in the SEZ policy • Special emphasis on talent and infrastructure development • Infrastructure Development: provisions designed to complement the STPI scheme • Highest level of commitment to addressing core issues faced by the industry 25

PowerPoint Presentation:

Semiconductor Policy, 2006 • Encourages FDI in hardware production segment and provides lucid policy structure for attracting capital through focus policies • Government to bear 20% of the capital expenditure for manufacturing units located inside SEZs and 25% for those outside SEZs • Emphasis on wafer fabrication and ancillary manufacturing plants 26

Typical Organizational Structure:

Typical Organizational Structure 27

Major Players:

Major Players 28 Source: CMIE, April 2009

Financial Ratios:

Financial Ratios Financial Ratios TCS Infosys Wipro Genpact 2008 2009 2008 2009* 2008 2009 2007 2008 Current Ratio 1.98 1.83 3.3 4.71 2.54 1.83 2.475 1.744 Quick Ratio 1.97 1.83 3.28 4.67 2.44 1.76 1.163 0.571 Return on Assets (%) 30.6 25.33 32.06 32.14 15.18 11.92 3.236 7.377 Return on Equity (%) 40.6 40.6 33.14 32.67 28.07 28.61 7.01 11.21 Return on Capital Employed (%) 42.92 43.27 37.81 37.71 23.23 21.36 - - Earnings per Share 46.07 47.92 78.15 101.65 20.96 20.30 6.11 5.64 Gross Profit Margin(%) 24.64 25.01 31.7 34.1 18.63 19.64 37.343 40.507 Debt-Equity Ratio 0.01 0.01 0 0 0.03 0.4 0.09 0.416 *Infosys 2009 figures includes Net Tax Reversal of Rs.112 Crores . 29

TCS: Internal Analysis:

TCS: Internal Analysis Factors increasing the Competitive Advantage: The Global-Local Edge: possesses an excellent understanding of the business environment and technological issues faced by companies all over the world. Industry Experience & Technical Expertise: providing faster and superior-quality solutions to its clients hence increasing the value addition aspect. It also help bring solutions to market quicker and with higher quality. Intellectual Power: skills and expertise across the entire spectrum of technologies and industries. Training Programs and Best Human Resource Practices . 30

TCS: Internal Analysis…:

TCS: Internal Analysis… Reducing the cost of running IT: TCS, over the years, has learnt to control its IT costs by: -Reuse of software code and modules -Cost-arbitrage - Different currency exchange rates Reliable, scalable & cost effective delivery of services and solutions all because of the global delivery model being followed. Due to all these factors, TCS has achieved customer satisfaction ratings of 87% – much higher than the industry norm -- for on-time project delivery. 31

INFOSYS: CREATING VALUE FOR CLIENTS:

INFOSYS: CREATING VALUE FOR CLIENTS 32 Low-cost global delivery model value proposition for its clients, which includes: - Quicker, seamless transitions, and early ownership - Optimum onsite/offshore mixes through intelligent allocation of resources High degree of predictability through processes and reuse Satisfies Client Needs: Infosys saves a company about 40% in costs and allows the client to focus on increasing its revenue by targeting what they want to. Infosys makes everything customized to each client’s needs.

Wipro: Innovation:

Wipro: Innovation 33 Innovation is one of the focus areas for Wipro It is driven by strong R&D talent that raises the bar in delivering solutions that make a difference to the customers Won the NASSCOM – IT Innovation Award 2009 for their application services model - Cigma

IBM Daksh: Continuous Improvement And Growth:

IBM Daksh : Continuous Improvement And Growth 34 Key factors that helped to set and exceed uncompromising standards of performance and customer service. Continuous Improvement due to BPO Focus Dedicated Business Units Execution excellence: Focus, speed and reliability Re-engineering and adding value: Proven benefits and cost savings Transitioning and project management expertise: Ensuring successful migration and implementation Experience and expertise in building scale with complexity: Servicing your needs with competency

Genpact: Innovation:

Genpact: Innovation 35 Genpact was the first: to Introduce Best in class driven approach to Process Management focus on call center staffing optimization global delivery in Insurance Actuarial initiate KPO work set up services in China to serve Japan Genpact has not only helped organizations to reduce costs but has also enabled companies generate revenues through their process reengineering capabilities and Targeted Analytics. Through the Lean Six Sigma initiatives it has managed to drive process improvements to an altogether new level

Knowledge Process Outsourcing – Growth Driver for ITeS Sector:

Knowledge Process Outsourcing – Growth Driver for ITeS Sector • The genesis of KPO followed BPO services in India, however KPO is now picking rapid pace, with MNCs setting up third party captive units for data analytics, data modelling, etc. • NASSCOM estimates global KPO revenues of US$ 17 billion in 2009-10 with an estimated 60 – 70% Indian share, translating into a US$ 12 billion worth opportunity. • Growth drivers for this business include high productivity of Indian resources and growing adoption of KPO by Small and Medium Enterprises (SMEs). • Opportunities span across several service offerings; Legal Process Outsourcing, Financial and Market Research and Engineering Services Outsourcing are expected to be fast moving service offerings. 36

FUTURE TRENDS IN THE INDUSTRY:

FUTURE TRENDS IN THE INDUSTRY There would be pricing pressures coupled with contract renegotiations due to the economic uncertainty. India Inc would remain focused on tactical measures to achieve cost savings and greater productivity. Increasing Labor costs Consolidation Outsourcing Backlash Engineering Services Outsourcing (ESO), Avionics and other opportunities Services and software segments are estimated to cross USD 1.2 trillion by 2012. This is more than the 5.2 per cent growth expected in the total IT spending. The industry will continue to diversify in terms of geographies, verticals and service lines. 37

FUTURE TRENDS IN THE INDUSTRY :

FUTURE TRENDS IN THE INDUSTRY Lack of working age population in the developed economies and a significant long term cost arbitrage indicates India’s sustained cost competitiveness. Service providers are expected to enhance focus to domestic market to de-risk business and tap into the local growth opportunities. India Inc. is likely to increase its focus on developing a comprehensive risks framework and identify steps in managing them. 38

Conclusion and Group’s Point of View:

Conclusion and Group’s Point of View Short term: Latent domestic demand, moving-up the value chain, executing transformational projects, and owning services in value chain - provide good opportunities for the industry. Long term: Cloud Computing – Software as a service, Hardware as a service, Infrastructure as a service – provides a great opportunity for Indian IT & ITeS companies to deliver great scale of services. 39

References::

References: CMIE: Industry Market Size & Shares, April 2009 CMIE: Indian Industry A Monthly Review, April 2009 www.tcs.com www.infosys.com www.wipro.com www.genpact.com www.ibm.com/services/daksh www.moneycontrol.com www.money.rediff.com Dataquest, E&Y Research and Analysis 40

PowerPoint Presentation:

THANK YOU… 41

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