September , 2015

IT Services

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Structure of Indian IT Industry

Software products &

ER&D
$21 bn (18%)
Exports: $18 bn
Domestic:$3 bn

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IT Enabled Services IT services
Indian IT industry
$24 bn (20%) $61 bn (51%)
(Exports & Domestic)
Exports:$20 bn Exports: $49 bn
Domestic:$3 bn $ 119 billion Domestic:$12 bn

Hardware
$13.1bn (11%)
Exports: $0.4 bn
Domestic:$12.6 bn

Note: Figures correspond to FY14

Source: NASSCOM

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IT services exports growth to slow down

Growth to accelerate with improved macroeconomic environment

(USD bn)
10-12 per cent CAGR
100.0 21.3% 25.0%
18.9%
80.0 20.0%
14.5% 9-11%
60.0 12.7% 15.0%
9.9%
40.0 10.0%
5.0%

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20.0 5.0%
27.1 32.9 39.1 43 49 55 61 94
0.0 0.0%
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15E 2015-16P 2019-20P

Revenues (USD bn) Y-o-Y growth (RHS)

Source: NASSCOM, CRISIL Research

 IT services exports to grow by 10-12 per cent in 2015-16 in USD terms

– Growth to be driven by volumes; Slowdown from telecom , insurance and energy & utility verticals to impact growth

– Billing rates to be under pressure in commoditized services

– Cross currency headwinds mainly responsible for slower growth. Business environment remains strong

 Indian IT vendors are also increasingly focusing on new markets to mitigate geographic risks

 New technologies (SMAC) to grow in 20-30 per cent CAGR over the medium term

 Growth to be driven by compliance in BFSI (Dodd-Frank) and healthcare (OBAMACARE), global expansion in retail, increased automation
in utilities and adoption of newer technologies across verticals

 Domestic market which accounts for around 19 per cent of IT services industry is expected to grow at 13 per cent CAGR in rupee terms
over next five years. Growth will be mainly driven by government (key spender in domestic market) spending.

3
Indian vendors displaying increased maturity

Proven ability to execute complex projects Share of higher end services to improve
100%
180 160 18%
20%
160
80%
140 10% 20%
120 10%
60% 7%
100 12%
80 61 12%
54 40%
60
40 41% 36%
15

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20 20%
0
0% 7% 7%
Mar 08 Mar15
FY 2007 FY2015E
50 Mn+ 100 Mn+ High value services Custom application development
Application management Support and Training

Source: CRISIL Research Source: NASSCOM, CRISIL Research

Companies included- TCS, Infosys, Wipro, HCL Tech High value services include: IT consulting, system integration and network
integration
Others include: Testing, web services, e-commerce

 Vendors are moving up the value chain by executing complex assignments, focusing on non-
linear initiatives

 IS outsourcing and high value services are expected to grow faster; CAD to slow down

 According to NASSCOM, social and cloud to grow by 15-20 per cent CAGR and analytics and
mobility to grow by 30-35 per cent CAGR over the medium term

4
BFSI to remain major vertical; USA key geography

BFSI remains largest contributor Indian vendors still depends heavily on US market
100% 100%
90% 23.5 25.0 90% 23.5 25.0
80% 80%
70% 15.8 70% 15.8 16.0
16.0
60% 60%
50% 20.2 18.0 50% 20.2 18.0
40% 40%
30%

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30%
20% 40.5 41.0 20% 40.5 41.0
10%
10%
0%
0%
2009-10 2014-15E
2009-10 2014-15E
BFSI Hi-tech / Telecom Manufacturing Others BFSI Hi-tech / Telecom Manufacturing Others
Source: NASSCOM

 The BFSI vertical contributes to the largest share of IT services exports. Retail, healthcare and
utilities to grow faster

 North America (largely United States) has been the key market for Indian IT services exports
followed by Europe( primarily UK). However, Asia witnessed highest growth in ACV awards in 2012

 In domestic market, Government (~ 33%) is key spender followed by BFSI (~27%) and telecom
(~9%)

5
Service line mix

Custom application Customised development of software applications and

development
interfaces, enhancements to existing package applications
$19.7 bn

Software testing Black and white box testing of all applications, softwares,
$4.3 bn network systems to check all aspects of desired intention

Information systems strategy, IT and network planning,

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IT consulting
architectural assessments, technical systems and network
$1.5 bn
Project oriented design, supplier assessment
services
Planning, design, implementation and project management
System integration
of a solution that addresses a customer’s specific technical
$1.6 bn
or business needs
IT services Export
($55.4 bn) Network consulting and Operations assessment, network planning and design,
Integration
capacity planning, and maintenance planning.
$0.6bn

Application management Management of network-centred applications within an

$6.8 bn organization, such as e-mail, intranets and client/server.
Outsourcing
services

IMS outsourcing Managing all or part of a client’s information systems

Support and training $11 bn operations.
$3.9 bn

Note: Figures correspond to FY14

Source: NASSCOM , CRISIL Research

6
Dollar revenue growth to be driven only by volumes

Dollar revenue growth on declining trend Dollar revenue growth driven mainly by volumes
40% 30%

30%
20%
20%

10% 10%

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0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2011-12 2012-13 2013-14 2014-15 2014-15
2012-13 2013-14 2014-15 2015-16
Large companies (Tier 1) Mid-tier companies Infosys TCS

Fixed-price contracts on the rise

(per cent)

55 54.1
54.5
50 52.2 53.4
51.2 51.9 52.3
49.8 49.9
45 47.9
46.2 46.3 46.8
40

35
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2012-13 2013-14 2014-15 2015-
16
TCS Infosys Wipro HCL Technologies Median

Source: CRISIL Research, Company reports

7
Competitiveness of Indian IT Services Industry

 Level of Competition
Market – Tier 1 players account for around 60 per cent of
attractiveness
industry revenues. They not only compete with other
3 off-shoring destinations but also Indian arms of global
Dem onstrated Level of IT players
capability com petition
4 2
4  Scope for offering differentiated services

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Scope for – Services are differentiated by domain expertise,
3 offering
Scalability
differentiated process efficiency , project execution capabilities and
services
the ability to scale.

 Scalability
4-point scale with 4 being the highest and 1 being the lowest
– In spite of high attrition, players have managed to keep
Source: CRISIL Research
up with business requirements.

 Market Attractiveness
 Demonstrated capability
– Apart from Indian IT players, most of the global IT players
– Indian IT service players have moved up the value
have set up and subsequently ramped up their employee
chain from custom application development and
headcount, which are currently equivalent to Indian Tier
maintenance services to high end services like remote
I players
infrastructure management and enterprise application
– Indian IT service players service just 5.6 per cent of
services and are present across verticals like Financial
global IT services requirements which offers huge
services, Manufacturing, Healthcare, Retail, Energy
opportunity for growth
and Utilities.

8
EBITDA margins in 2015-16 – look for a correction

Attrition rate to worsen further (-Ve) Utilisation rate at all time high (+ ve)
(per cent) (per cent)
22 88
86
20 82.8 83.0
84 82.0 82.7 81.6
18 82 80.1 80.2 80.3
78.6 78.6 79.0
16 80 77.6 77.9
14 78
76
12
74

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10 72
8 70
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2012-13 2013-14 2014-15 2015- 2012-13 2013-14 2014-15 2015-16
16
TCS Wipro Infosys HCL technologies TCS Infosys Wipro HCL Technologies average

Marginal appreciation of rupee to impact EBITDA (- Ve) Sensitivity of EBITDA at various exchange rate
30% 65.0
25.8% Average Rs/$ Op margin change (bps)
26.2%
60.0
25%
66 0-50
55.0
20% 18.1%
16.5% 65 (50)-0
15.4% 50.0
15%
45.0
64 (100)-(50)
10% 40.0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 63 (150)-(100)
2012-13 2013-14 2014-15 2015-16
Exchange rate (Rs/$) (RHS) Tier-1 Margins Mid-tier margins 62 (200)-(150)

Source: CRISIL Research, Company reports

9
EBITDA margin to decline by 50-100 bps in 2015-16

EBITDA 2013-14 2014-15

Negatives Positives (per cent)

Tier-1 26.7 25.9

Mid-tier 17.1 15.7

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Note: Tier-1 companies include: TCS, Infosys, Wipro, HCL
Technologies
Mid-tier companies include: 6 mid-sized companies
Source: CRISIL Research

Margins of mid-tier players are lower than tier-I players due to

 Higher employee cost (around 400 bps higher)
 Higher SG&A expenses (around 200 bps higher)

 Significantly lower employee utilisations (around 600-800 bps lower)

10
Focus on non-linear revenue streams to impact hiring

IT services exports employee base to grow at 5-6 per cent CAGR

(Thousands)
2500 2276
5-6 per cent

2000
1742

1500 9 per cent

958

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1000

500

0
2009-10 2014-15E 2019-20P

Source: NASSCOM, CRISIL Research

 Indian IT services exports industry to have a direct employee base of ~1.9 million in 2018-19

 Focus on non-linearity & improved productivity to reduce growth in employees

 Employee base to grow by 5-6 per cent CAGR over the next 5 years as against 9-10 per cent CAGR
over the last five years

 In domestic market, Employee base to grow by 4-5 per cent CAGR over five years to reach 0.6
millions.

11
Annexure I:Long term demand: Methodology

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12
Annexure II: Employee count projection

Actual Revenue Employee base

(FY10-FY15) (FY10-FY15)

Revenue per employee for each year (FY10-FY15)

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Forecasted industry revenue (FY16-FY20)

Revenue per employee

adjusted for nonlinear growth

Forecasted number of employee (FY16-FY20)

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Last updated: August, 2014

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