Power Pack

IT Services

1
• Industry Overview :3

• Operating Parameters :7

• Analysis of Risks : 18

• Growth Outlook : 32

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 Industry Overview

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 Though global IT industry has been growing at 5.9% CAGR,
IT services segment growth has been muted.

GLOBAL SIZE AND SEGMENTATION

Source: Nasscom
4
 US and EMEA account for 80% of the global IT spending.

IT/ITES REGION-WISE SPENDING

Source: Crisil Research

5
 Size of Indian IT industry is $166 bn and exports constitute
76%.

Indian IT industry Overview

Source: Nasscom, Crisil Research

6
 Operating parameters

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KEY OPERATING PARAMETERS

• Margins

• Billing Rates

• Onsite Billing

• Utilization Rates

• Employee costs, attrition and additions

• R&D spend

• Type of contracts

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 Net Margins have remained static over the years due to cost
cutting of IT players.

NET MARGINS

Source: Company reports, CRISIL Research

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 Billing rates for the Indian IT players have remained flat over
the last few years.

Billing Rate

•Indian IT services exporters

have not been able to raise

billing rates over the past few

years, ever since the financial

crisis in 2008-09.

Source: Nasscom
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 Though the proportion of onsite billing is maintained, several
factors have made Indian IT companies to hire locals for their
onsite roles.
• Players face several issues in
SHARE OF ONSITE IN THE OVERALL MIX onsite front:
 'Protect And Grow
American Jobs Act‘ to
increase jobs for locals.
 Proposal to increase
minimum wage for H-1B
workers from $60,000 to
$100,000.
 Barring the spouse of H1B
visa workers from seeking
employment.
• Indian IT players are expected
to increase local hiring as short-
term solution.
• Thus, Infosys has already
announced plans to hire around
Source: Company reports, CRISIL Research 10,000 local employees in the
11 United States.
 Utilization rates have peaked and further increase in utilization
is not possible.

Utilization Rates (including trainees) at all-time high

Source: Company reports, CRISIL Research

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 Employee costs of Tier-1 companies are lower than that of the
mid-tier companies due to economies of scale.

Employee Costs as % of Revenues

Source: Crisil Research

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FOCUS ON TIER 2 CITIES

• Companies are expanding their delivery centres to Tier II cities, which have

much lower rents/capital value and hence give a cost advantage.

• In recent years, many such centres have come up in Tier II cities.

• In fact, 55% of Infosys’s new capacity addition under construction (by

number of seats) are in Tier II cities.

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 Employee attrition rate has been around 15%.

EMPLOYEE ATTRITION RATES

Source: Company Reports, Nasscom

15
 While Indian firms have increased their R&D budgets, they lag
behind their international peers.

R & D SPEND
While the consolidated annual

R&D budget for Wipro is around

$50 million and that for Infosys

was nearly $120 million, they

both dwarf the amount put in by

their international competitors

like IBM, which had a $6 - $6.5

billion annually in R&D.

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 Due to Client pressure, Indian IT services companies have been slowly
moving towards fixed-price contracts with service-level agreements
(SLAs).

FIXED PRICE CONTRACTS WITH SLAs ON THE RISE

• Clients want tighter control on

costs and productivity

• Indian IT companies have begun

designing productivity-linked

contracts to provide greater value

to clients and are thus investing

more in improving clients‘

Source: Company Reports, Crisil Research processes.

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 Analysis of Risks

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 Type of Risks

• CURRENCY RISKS
• POLITICAL RISKS
• COMPETITION FROM LOW COST COUNTRIES
• GEOGRAPHICAL RISKS
• AUTOMATION RISKS
• VERTICAL RISKS
•Verticals are the industries which the clients belong to. Verticals include
BFSI, Telecom, Retail, Pharma, Manufacturing, Logistics etc.
•If a software company is too much dependent on one or two verticals, it is
considered to carry a high vertical risk. (Ex: Aricent Technologies)
• SERVICE LINE RISKS

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Type of Risks

• SERVICE LINE RISKS

•Service lines are the type of work that a software company is doing for
their clients.
•It could vary between low-end and high-end.
•Low-end Service lines
•Low-end service lines are Programming (CAD), Maintenance,
Support, Testing, Infrastructure Management Services etc.
•These services are highly commoditized and there is strong
competition from low-cost countries.
•Companies typically get $25/hr to $30/hr for the low-end services
•High-end Service lines
•IT consulting, Analytics, Systems Integration are high end service lines.
•IT consulting and Analytics require significant business management
skills and overall business perspective rather than IT and programming
skills.
•Companies command much higher billing rates for these high-end
20services (it could go even upwards of $100 / hr)
ILLUSTRATION OF VERTICAL AND SERVICE LINE RISKS
Service Verticals
Lines
BFSI Tele Manufa Reta Pharma Logistics Utilities Media
com cturing il
Programm
ing
Maintenan
ce
Testing
IMS
Analytics
IT
Consulting

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Which of these risks affect the Indian IT companies?

• High
• CURRENCY RISKS
• About 75% of industry revenues are
from exports

• POLITICAL RISKS • High

• COMPETITION • High
FROM LOW COST • Competition from countries like
COUNTRIES Vietnam, philipines, China etc
• High
• GEOGRAPHICAL RISKS • 80% of exports to US and UK (62%
to US and 18% to UK)
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 Indian companies are affected by all these risks in a
big way

• High
• VERTICAL RISKS
• About60% of industry revenues are
from 2 verticals: BFSI and Telecom

• High
• SERVICE LINE RISK • More than 90% of the revenues
come from low-end service lines

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ILLUSTRATION OF VERTICAL AND SERVICE LINE RISKS
Service Lines Verticals
BFSI Telecom Manufacturing Retail Pharma

Programming (Custom
Application
Development)
Application
Management
Software Testing
Infrastructure
Outsourcing
IT Consulting
Analytics
Systems Integration

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 High end services like Consulting, Analytics etc constitute a
very small proportion of India’s IT exports.

SERVICE LINE MIX OF INDIAN EXPORTS

Source: Nasscom
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OVERCOMING RISKS

• Difficulty of overcoming a risk involves:

• How much of existing competencies can be transferred?

• How much of new learning or effort or investment is involved?

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OVERCOMING RISKS
Geographical Risks

BFSI BFSI
Application Development Application Development
US Germany

• This involves understanding the practices (cultural, business and

regulatory) of the new geography
•Existing competencies in Vertical and Service Line will be helpful to
over come this risks

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OVERCOMING RISKS
Vertical Risks

BFSI Healthcare
Application Development Application Development

• This involves understanding the new vertical

•Services Line Competencies can be used to over come this risks

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 Service Risks

Application Development, IT Consulting, Analytics

IMS, Support etc

• This risk is very difficult to overcome because:

 Very little of existing competencies can be transferred
 Tough competition from big players (Accenture,
EDS (HP) etc)
 Brand positioning of Indian IT players
• But it is important to overcome the service line risk as:
•This involves moving up the value chain (removing other risks is
more a horizontal movement)
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• Billing rates can be improved only by moving up the service line risk
 62% of exports from India are to US while around 15% are to UK.

IT EXPORTS BY GEOGRAPHIES

Overall Indian IT Industry TCS (Q4 2018)

Source: Nasscom

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 About 70% of IT exports are from 2 verticals – BFSI and Telecom.

IT EXPORTS BY VERTICALS
TCS (Q4 2018)
Overall Indian IT Industry

Source: Nasscom
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 Growth OUTLOOK

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 Exports growth are expected to be in the range of 7-8% CAGR
between 2018 to 2022.

EXPECTED EXPORTS GROWTH

Source: Crisil Research

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 About 70% of all incremental growth in IT exports is expected to
be in digital services.

IMPORTANCE OF DIGITAL SERVICES

Source: Nasscom, Crisil Research

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