Indian IT-ITES – FY05 Results and FY06 Forecast

S. Ramadorai, Chairman NASSCOM, CEO & MD TCS Kiran Karnik, President NASSCOM Press Conference, Bangalore June 2, 2005

This material was used by NASSCOM during an oral presentation; it is not a complete record of the discussion. No part of this document may be circulated, quoted, or reproduced for distribution without prior written approval from NASSCOM.

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FY05 results have exceeded last year’s forecasts
Domestic Market ITES-BPO Exports IT Software and Services Exports

USD Billion

32%
25%*
16.7 16.7%* 22.0 20.5 23.0%

Overall software and services (exports + domestic) grew by 32% against a forecast of 25% Exports grew by 34%
– Strong growth validates the economics of offshore outsourcing – Highest growth since the slowdown in 2001

4.2
44.4%

4.8 5.2

3.9 3.6
41.7%

5.1
30.4%


12.0

Domestic revenues* grew by 23%
*FY04 estimate restated (up from USD3.6bn); includes value of domestic ITES-BPO; forecast growth of 16.7% was on a base of USD 3.6bn

9.2

21.7%

11.2

FY04
Source: NASSCOM

FY05P

FY05

Copyright © NASSCOM 2005

2

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Driven by strong fundamentals and broad based growth
Exports Domestic

Indian IT Software & Services
USD Billion

Software and services* grew by 27%
– Indian vendors establishing their presence in high-margin segments – MNCs ramping-up offshore delivery capabilities in India – SME growth about 20-22% – Increasing interest in R&D / engineering services / embedded systems – FY05 revenue from product development & R&D services ~USD 3.0bn (up from USD 2.3bn in FY04)

12.0 9.2 3.6 4.2

FY04
Source: NASSCOM

FY05

Exports Domestic

Indian ITES-BPO
USD Billion

5.2 3.6 0.3 FY04
Source: NASSCOM Copyright © NASSCOM 2005


0.6

ITES-BPO* grew by nearly 49%
– Steady growth in traditional services – Increasing traction in high-end process outsourcing – Growing domestic segment
* Includes domestic and export revenues

FY05
3

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Market indicators remained strong in FY05
Growth in addressable market Geographical mix Client wins / increased penetration Pricing trends and industry profitability • Expansion of services: infrastructure management, network management, consulting • New geographies and vertical markets all leading to a sustained demand backdrop • While US and UK remain the dominant markets • Indian companies gaining traction in newer geographies; Japan, Germany, Singapore • Rapid volume growth; clients continued to ramp up engagement sizes with leading vendors
– Over 660, USD 1mn+ clients with the top-4 players alone – up from 441 in FY04

• Steady increase in net client additions across all four quarters • Stable pricing environment (marginal upward bias)
– IT Services: Onsite rates USD 55-65 per hour; offshore rates USD 18-26 per hour – BPO: Wider range; some segments more susceptible to downward pressure

• Cost-margin profile supported by declining technology costs, tighter discretionary controls, increased rollout of variable compensation schemes, a shift to lower-cost campus recruits, sales and marketing leverage through more effective account mgmt, and scale economies Vendor maturity • Focus on improving revenue mix and increasing realizations, utilization • Mid-sized companies instead emphasizing domain knowledge and process management skills and demonstrating the value of a focused solutions provider; walking away from price-driven deals • BPO firms balancing voice and non-voice business portfolios to diversify revenue and raise seat utilization • Indian players instrumental in cross border M&A activity in IT services and BPO
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And the sector scaled record levels of employment
Employee numbers ‘000s
IT Software and Services ITES-BPO 490 416 360 242 180 42 FY00
Source: NASSCOM

CAGR 29.8%

697 588

18.5% 37.0%
254 348

70 FY01

106

FY02

FY03

FY04

FY05

Industry employee base crossed the 1million mark in FY05
– IT Software and services employee base has grown at a CAGR of 23.6% (FY00-05) – ITES-BPO employee base has grown at a CAGR of 52.6% (FY00-05)

Indirect employment attributed to IT-ITES – 2.5 million in FY05
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Outlook for FY06 is positive; export growth 30-32%
ITES-BPO Exports IT Software and Services Exports

USD Billion

Current penetration of IT budgets of Global 1000 clients is low relative to the opportunity size Emerging service opportunities in BPO, infrastructure management, testing services, consulting, etc. India’s offshore value proposition remains the strongest
– Superior offshore process management and service delivery capabilities – Talent pool: size does matter –esp. when you need to scale-up

30-32%
34% 12.8 44.4% 17.2 40-42%

22.5

7.3

5.2
25-27%


15.2

3.6
30.4%

9.2

12.0

FY04
Source: NASSCOM

FY05

FY06P

Copyright © NASSCOM 2005

6

TM

Forecast growth for domestic market in FY06 – 25%
Domestic Market

USD Billion

25%
23%

6.0

4.8

Growth forecast for the domestic market is relatively lower – highlighting the different stages of maturity in the markets With progressive deregulation and rising competition, companies are increasing their focus on the domestic market; especially on emerging sectors such as retail, logistics, telecommunications and SMEs Significant untapped potential, rapid adoption and small base likely to result in high growth (rate) in domestic BPO

3.9

FY04
Source: NASSCOM

FY05

FY06P
TM

Copyright © NASSCOM 2005

7

Indian IT-ITES on track to reach USD 50bn exports by FY09
CAGR
10 YR TARGET ACHIEVED REQUIRED

PERIOD
FY99-09 FY99-05 FY05-09

DOMESTIC MARKET*

EXPORTS*

INDUSTRY TOTAL 31.2% 31.3% 31.1%

USD Billion 50-52

23.5% 18.9% 30.7%

34.7% 37.0% 31.2%

* Includes IT Software and Services as well as ITES-BPO

Industry performance tracked continuously and targets revisited every three years
17.2

NASSCOM-McKinsey Study 1999, 2002 & 2005
12.8 9.6 7.7 6.2 2.6 1.7 FY99
Source: NASSCOM Copyright © NASSCOM 2005

13-15

4.0 1.9 2.5 2.6 3.0

4.8 3.9

FY00

FY01

FY02

FY03

FY04

FY05

FY09^
^NASSCOM McKinsey Study 2002

8

TM

Key trends likely to shape industry growth in FY06
• Offshore penetration of the Fortune 500 increased by 33% in 2004 (from 300 to 400)
– Recent momentum complemented by low penetration levels (value ~2%) will continue to drive rapid offshore adoption

While a direct face-off between offshore-centric players and global service providers is unlikely (given their differing revenue mix); the degree of competition is set to increase:
– Global IT majors will gain noticeable scale in their offshore service delivery capability – to be leveraged while bidding for new contracts – Indian / offshore-centric vendors will steadily gain market share in segments of traditional IT outsourcing – highlighting the adaptability of the offshore model

• • •

Greater global delivery model (GDM) adoption; increased interest in newer offshore destinations – though India is expected to remain the leader Pricing trends in BPO likely to be susceptible to downward pressure, increasing the emphasis on operational excellence to sustain margins Integration of IT-BPO contracts to become more common
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While other destinations are also emerging...
Total India 39.6 Total India 94.0

17.2 12.6

48.0 20.9

Canada

Canada

Total value of outsourcing to India – USD 17.2bn in 2004 – estimated at 44% of the worldwide total Worldwide spend is forecast to reach USD 94bn by 2008 Value of work outsourced to India is forecast to reach USD 48bn by 2008

China Eastern Europe Philippines

1.9 1.8

China Eastern Europe Philippines

5.0 6.4

0.9

2.6

Mexico 0.5 Others 4.7

Mexico Others

1.1 10.0

2004

2008

Source: neoIT

Copyright © NASSCOM 2005

10

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…India still ranks as the preferred destination
1
Factors India China Malaysia Czech Republic Singapore Philippines

Financial Structure (Scale: 1-4)
Compensation Infrastructure cost Tax and regulatory Sub Total 3.19 0.23 0.3 3.72 3 0.23 0.09 3.32 2.5 0.33 0.26 3.09 2.24 0.27 0.13 2.64 0.91 0.22 0.34 1.47 3.14 0.22 0.23 3.59

People Skills and Availability (Scale: 1-3)
BPO experience Size & availability of labour Education Language Employee retention Sub Total 1.03 0.47 0.25 0.21 0.13 2.09 0.48 0.6 0.21 0.07 1.36 0.19 0.02 0.27 0.14 0.11 0.73 0.23 0.01 0.33 0.17 0.18 0.92 0.61 0.33 0.25 0.17 1.36 0.42 0.08 0.19 0.14 0.11 0.94

Business Environment (Scale: 1-3)
Country risk Country infrastructure Culture adaptability Security of Intellectual Property Sub Total 0.83 0.2 0.1 0.18 1.31 0.68 0.15 0.1 0.93 1.03 0.24 0.28 0.22 1.77 1.06 0.28 0.38 0.3 2.02 1.41 0.4 0.43 0.39 2.63 0.57 0.13 0.05 0.17 0.92

Total
Copyright © NASSCOM 2005
Comparative rating for offshore destinations Source: AT Kearney

7.12

5.61
11

5.59

5.58

5.46

5.45
TM

Sustained competitiveness in spite of rising people costs

Source: GECIS

Copyright © NASSCOM 2005

12

TM

Five S’s For IT Take-off
SKILLS Expand Skill sets to create value Bigger pool to stem attrition/wage inflation Create academic Alliances through UGC Skills certification for BPO-entry level Certification for front line supervisors SYNERGY Synergize to capture value Sharing knowledge & learning's Co-operate and compete to grow Hardware – Software synergies SECURITY Secure Destination for added value Strengthen IT Act further 4E framework for trusted Sourcing Improve Data Protection & Privacy Laws India as a Centre of Process Excellence SCALABILITY Scale New Ground Bring growth to Tier I & II towns GATS to ensure people movement Emphasize off-shoring benefits SCORE Score Globally With R&D
Collaborate with Academia Forge Alliances
Copyright © NASSCOM 2005

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TM

Innovating to Stay Ahead
Incubation labs Solution mindset Collaborate with Academia Speed

Idea generation

Productivity Scalable Architecture Real Time Systems IPR

People

NASSCOM as Facilitating Body

Create business Propositions

Create Standards Collaborate with Educational Institutes to attract people Invest in R&D
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Brand Creation

Drive and Shape Industry
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Productization Encourage entrepreneurship
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