Power Pack

IT Enabled Services

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• Industry Overview :3
• Segmental Analysis :9
• Key Trends : 19
• Exports : 13
• Domestic Market : 29

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 Industry Overview

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Global information technology spends

Source: NASSCOM, Crisil Research

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Worldwide spends on ITeS and related activities

Source: NASSCOM, Crisil Research

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Worldwide spends on ITeS and related activities
• The few key trends witnessed in the BPO segment were:
• Process automation, Platform/BPaaS delivery mechanisms, analytics were main growth
drivers Matured clients moving towards gain sharing, outcome based pricing; though Full
time employee (FTE) model continues to dominate Enterprise preferences shifting to
onshore and co-location delivery with greater emphasis on multi-skilled workforce

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Faster growth in Indian market helped increase share

• Substantial shifts in every aspect of business has created a noteworthy shift in the
business process management market, which has been driven by increase in the use
of automation and analytics to further increase enterprise operational efficiencies as
well as gain deeper insight into business performance.

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Increasing share of India in global BPM market

Source: NASSCOM, Crisil Research

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 Segmental
Analysis

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Export revenues of the Indian ITeS industry ($ million)

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Customer care and transaction services form larger portion of ITES industry

• IT-enabled services include a wide range of services that rely on information technology as
the means of service provisioning.
• Indian ITeS industry has been segmented horizontally (by services provided) into customer
care, transaction services (finance, administration and payment services, procurement and
logistics services), and KPO-based services.
• IT-enabled services (ITeS) encompass a wide range of services that rely on information
technology as means of service provisioning and internet as transport medium.
• ITeS can be broadly categorised into horizontal and vertical-focused service lines.

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Export revenues of the Indian ITeS industry ($ million)

Source: NASSCOM, Crisil Research

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 Exports

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Knowledge services to maintain growth momentum until 2023

• ITeS exports are expected to rise at a slower pace up to fiscal 2023.

• A shift towards non-voice and multi-channel customer relationship management, along
with continued traction from knowledge services (mainly analytics), will drive expansion
for Indian ITeS vendors over the long term.

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Knowledge services to drive exports revenue growth until 2023
• IT-enabled services (ITeS) exports to register a subdued 6-7% growth (in constant
currency US dollar terms) over the next five years.
• In fiscal 2018, the sector's export revenue stood at $28.1 billion. This to increase to $30
billion by the end of fiscal 2019 and reach ~$39 billion by the end of fiscal 2023 clocking
a CAGR of 6-7%.
• The growth will be primarily driven by fast growing knowledge services as clients
increasingly adopt analytics and robotic process automation.
• In the customer relationship management (CRM) space, the growth is expected to slow
down owing to competition in the voice space from the Philippines and shift towards
chatbot-based solutions.
• Transactional services are also expected to slow down on account of commoditisation and
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Knowledge services to drive exports revenue growth until 2023
• The banking, financial services and insurance (BFSI) segment has seen an uptick in spends
due to need to automate and improve customer experience; spending is being made
towards chatbot-based solutions which are expected to drive future investments in this
segment.
• The growth in retail and healthcare is expected to prop up revenue as they also transition
towards robotic process automation (RPA)-based solutions.
• The telecom sector's health remains a monitorable as consolidation of companies , like the
• impending merger of T-mobile and Sprint in the US and Vodafone andLiberty Global in
Europe, can result in a reduction of business for the ITes sector.
• This coupled with the ongoing Brexit negotiations, has resulted in less technology
investments in the space.
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Knowledge services to be key growth driver for sector exports revenue

Source: NASSCOM, Crisil Research

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Knowledge services to be key growth driver for sector exports revenue
• The knowledge services segment is expected to grow more than the industry average, with
the segment's exports CAGR at 9-12% over the next five years.
• It is likely to gain share in export revenue at the expense of CRM and transaction services
segments, as was the case over the past five years.
• CRM is expected to grow at a slower CAGR of 4-6% and transaction services 5-7%, near
the industry level growth rates.
• Knowledge services are likely to be the fastest growing, driven by high-value services such
as big data analytics and artificial intelligence (AI)-based automation.
• The segment is also expected to increase its share in ITeS export revenue to ~26% by fiscal
2023 from ~21% in fiscal 2018.

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Knowledge services have gained share in export revenue over past few fiscals

Source: NASSCOM, Crisil Research

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Knowledge services have gained share in export revenue over past few fiscals

• ITeS export revenue growth, which clocked ~9% CAGR over the previous five years, is
expected to slow down to 6-7% CAGR until fiscal 2023 due to pricing pressure in
traditional services such as CRM and transaction services, which accounted for ~78% of the
total revenue as of fiscal 2018.
• Nevertheless, the growth in the knowledge services segment is expected to be in the 10-
13% range, which would support both overall revenue and margin .

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Growth drivers and inhibitors in ITeS exports

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India maintaining its edge despite competition from other destinations

• India, the Philippines and Latin America (mainly Brazil and Mexico) account for
~80% of the world's ITeS outsourcing market, with India holding around 37% share in
global sourcing in fiscal 2018 (this is expected to remain steady in fiscal 2019 too).
• India competes with other destinations on cost arbitrage and quality of service.

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India still a cost-effective destination with the Philippines closely following

Source: NASSCOM, Crisil Research

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Pricing pressure to have bottomed out for players

• Exports have traditionally been dominated by CRM services, wherein the Philippines has an
edge over India due to better English proficiency and similar costs per employee.
• India, however, enjoys an edge over other countries in non-voice CRM and knowledge
services owing to its large talent pool.
• India is becoming a preferred destination for non-voice processes, transactions and high-
end services, such as analytics, due to availability of both quantity and quality of skills
compared with countries such as the Philippines.
• With wider adoption of automation and robotics, India to maintain the edge in the
knowledge services space going forward.
• Prices expected to bottom out for traditional segments such as CRM and transactions and
remaining range bound.
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Dependence on US continues; BFSI, telecom remain dominant verticals

• Geographical and vertical-related risks persist in the Indian ITeS industry. The US has
traditionally accounted for ~60% of India's ITeS export revenue.
• The share to remain high in fiscal 2019, making the industry susceptible to vagaries of the
economic and political developments there.
• To counter this, the ITeS players have tried to diversify their geographical mix over the past
five years.
• They have penetrated emerging markets in the Middle East and Asia-Pacific by setting up
delivery centres and targeting clients there.
• However, even as players have seen significant growth from these regions, emerging
markets have aminimal share in the overall business.

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Dependence on US continues; BFSI, telecom remain dominant verticals

• Consequently, the US, being the world's largest economy, and the UK continue to influence
the fortunes of the Indian ITeS players.
• Thus, geopolitical developments in the UK and the US -- Brexit negotiations and the
policies of President Donald Trump with respect to deregulation and immigration -- remain
key monitorables

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USA to maintain dominant share in revenues

Source: NASSCOM, Crisil Research

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USA to maintain dominant share in revenues

• With their share close to 70%, the BFSI and telecom sectors are dominant revenue
contributors for the Indian companies.
• This trend to continue in the near future. Smaller verticals such as retail, healthcare, travel,
and transport are, however, growing faster than BFSI and telecom.

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 Domestic Market

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Deteriorating financial health of telcos to impact domestic ITeS growth
• Major ITeS vendors are shifting their focus to the exports market due to lower profitability
in the domestic business.
• As a result, revenue from the domestic market has declined over the years.
• Domestic ITeS to grow at slower pace of 7-8% in the next five years, owing to lower IT
spends by telecom players.
• Banking, financial services and insurance, along with emerging verticals, will drive
growth over the long term.

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BFSI and government spend to drive high single-digit growth in domestic
ITeS revenue in next five years
• Domestic revenue of information technology-enabled services (ITeS) companies to grow
at a compounded annual growth rate (CAGR) of 7-8% over the next five years.
• Revenue is projected to grow 8% on-year from Rs 281 billion in fiscal 2018 to Rs 300
billion in fiscal 2019, to ~Rs 326 billion in fiscal 2020, and further to ~Rs 400 billion in
fiscal 2023.
• Sectoral volumes are expected to be driven by the banking, financial services and
insurance (BFSI) and government segments.
• While cost pressures are expected to lead to a decline in telecom sector growth, emerging
segments such as travel are expected to provide the ITeS sector with other domestic
growth avenues.
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ITeS revenue growth to slow down owing to pressure in telecom

Source: NASSCOM, Crisil Research

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Domestic ITeS will continue taking a backseat vis-à-vis exports
• With the capital expenditure requirements for setting up of business process outsourcing
(BPO) units being low compared with most other sectors, the domestic market has many
small players competing for contracts.
• This has led to intense competition and pressure on billing rates, and therefore, on
profitability of players.
• The lower share of high-value offerings such as knowledge services in the domestic
market, compared with the exports market, is another factor contributing to lower
domestic margins.
• With lower billing rates, employee costs as a percentage of sales are also higher for
domestic players.

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Exports preferred to domestic markets

Source: NASSCOM, Crisil Research

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Exports preferred to domestic markets

• For fiscal 2018, the earnings before interest, tax, depreciation and amortisation (EBITDA)
margins of ITeS players in the exports domain at 10-14%, and that of domestic players at 8-
10%.
• This reflects the preference for exports over the domestic market among players, which is
expected to continue in the future, too.

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