Information Technology In India

The last 20 years of the 20th century was most significant period for Indian economy. During this period the nation has identified its economic destiny with great clarity.

The most precious achievements of this period was the development of Information Technology. Indian Software industry has made significant contributions to the world

of IT by gifting some of the leaders of the industry from Indian soil. Infosys and Wipro are already within the top ten leaders of the list, and many others are occupying

significantplaces in the list.

The industry has been performing at a staggering rate of growth of about 50 per cent every year and has sustained global competition.

The government of India has been helping the development of domestic IT industry with a view to tap the maximum potential of the sector. It has created a ministry for

the purpose, and the other steps include removing license rule, creating industry friendly government departments, offering tax holidays, allowing foreign investment in

the sector, and promoting NRIs to set up business in India and by creating special economic zones.

Information Technology In India

 Indian IT Sector - Overview

 Scope of IT Industry in India
 Top Players in the Industry
 Career Opportunities
 Recent Developments

IT Sector - An Overview

IT Services can further be categorized into Information Services (IS) outsourcing, packaged software support and installation, systems integration, processing
services, hardware support and installation and IT training and education.

Engineering Services include Industrial Design, Mechanical Design, Electronic System Design (including Chip/Board and Embedded Software Design), Design
Validation Testing , Industrialization and Prototyping.

IT Enabled Services are services that use telecom networks or the Internet. For example, Remote Maintenance, Back Office Operations, Data Processing, Call
Centers, Business Process Outsourcing, etc.

E Business (electronic business) is carrying out business on the Internet; it includes buying and selling, serving customers and collaborating with business partners.

Major Trends
 Trends in Hiring
The bar chart shows that the recruitment of engineers and IT professionals in the industry is growing at the Compound Annual Rate of 14.5% approximately.

In the FY06, the direct employment in the IT-ITES sector was 1.3 million people and the indirect employment was 3 million approximately.
 Trends in Salary Hikes

Along with abundant growth opportunities, IT sector is one of the highest paying sectors. The average increase in salary in IT sector across the levels was around 16%
and the average increase in the ITeS BPO sector across the levels was in between 16%-18% Requisites for balanced salaries -
 End to poaching
 Review of compensation according to the skills
 Developing talent in-house
 Entry of talented freshers in the industry

IT: Success Factors

 Increasing number of skilled professionals in IT.
 The demographic factor. Approximately 60% of the population of India lies in the age group of 15-65. More than half of the population of India is below the age of
25. So in the future, the number of working people is going to be more than the number of dependants.
 The vast academic infrastructure of India. In the year 2006, Total Enrollment in colleges was 9.3 million and India produced 441,000 Technical graduates.
 India has the second largest English-speaking workforce in the world.

Swot Analysis

Strengths Weaknesses

 Highly skilled human resource •  Absence of practical knowledge

 Low wage structure
 Quality of work •  Dearth of suitable candidates
 Initiatives taken by the Government (setting up Hi-Tech Parks and
implementation of e-governance projects) •  Less Research and Development

 Many global players have set-up operations in India like Microsoft,

Oracle, Adobe, etc. •  Contribution of IT sector to India 's GDP is still rather small.

 Following Quality Standards such as ISO 9000, SEI CMM etc.

 English-speaking professionals •  Employee salaries in IT sector are increasing tremendously. Low wages benefit
will soon come to an end.
 Cost competitiveness
 Quality telecommunications infrastructure
 
 Indian time zone (24 x 7 services to the global customers). Time
difference between India and America is approximately 12 hours,
which is beneficial for outsourcing of work.

 
 Opportunities Threats

 High quality IT education market  Lack of data security systems

 Increasing number of working age people  Countries like China and Philippines with qualified workforce
 India 's well developed soft infrastructure making efforts to overcome the English language barrier
 Upcoming International Players in the market  IT development concentrated in a few cities only

   

Scope of IT Industry in India

The IT industry has great scope for people as it provides employment to technical and non-technical graduates and has the capability to generate huge foreign exchange
inflow for India. India exports softwares and services to approximately 95 countries in the world. By outsourcing to India, many countries get benefits in terms of labour
costs and business processes. Also, the Indian companies are broadening the range of services being provided to the customers, which is resulting in more off shoring.
Talent acquisition, development and retention initiatives taken by the companies have brought down the employee attrition rates, thereby providing more stability to the
employees and increasing their job commitment.

Many financial institutions are providing funds for the expansion of IT and ITeS businesses. In order to support IT and ITES, the Indian Government is also taking many
steps. For example:

1. The Govt. has provided incentives including tax holiday up to 2010 and competitive duty structures.
2. The Govt. is trying to reduce the international communication cost.
3. It is providing infrastructure support through organizations such as software technology parks.

All these factors collectively create a number of opportunities in the IT sector.

Future of Information Technology

IT will continue to gain momentum; telecom and wireless will follow the trend. The immense expansion in networking technologies is expected to continue into the next
decade also. IT will bring about a drastic improvement in the quality of life as it impacts application domains and global competitiveness. Technologies that are emerging are
Data Warehousing and Data Mining. They involve collecting data to find patterns and testing hypothesis in normal research. Software services that are being used in
outsourcing will go a long way.

Future Estimates (For 2008):

 Annual revenue estimated for the industry is US$87 billion.d

 Software and Services will contribute over 7.5% of the overall GDP growth of India.d
 IT exports will constitute 35% of the total exports of India.d
 There will be 2.2 million jobs in IT sector.d
 IT industry will attract FDI of US$ 4-5 billion.d
 Market capitalization of IT shares will be approximately US$225 billion.

IT Sector - Top Players

S. NO. Companies
1. TCS
2. Infosys
3. Wipro
4. HP
5. IBM
6. Satyam
7. HCL
 8. Patni
9. Polaris
10. Cisco
11 KPIT Cummins
12 Kanbay
13 Microsoft
14 Dell
15 Larsen and Toubro
16 Compare Infobase
17 Accenture
18 i-Flex Solutions
19 Cognizant
20 Sapient
21 Mphasis

Recent Developments in IT-ITeS Sector:

Indian IT-ITeS sector is growing rapidly. It has a lot of scope for people who are aspiring to work in this
sector. This sector offers job seekers a lot of opportunities. There will be 2.2 million jobs in IT sector. IT
exports will constitute 35% of the total exports of India.

New developments take place every now and then, which results in the overall development of the sector.
Let us have a look at all the recent developments in this sector.

Overview of it industry
The Indian IT Industry

The Information Technology (IT) sector in India holds the distinction of advancing the country into the new-age economy. The growth momentum
attained by the overall economy since the late 1990s to a great extent can be owed to the IT sector, well supported by a liberalised policy regime with
reduction in telecommunication cost and import duties on hardware and software. Perceptible is the transformation since liberalisation – India today is
the world leader in information technology and business outsourcing. Correspondingly, the industry’s contribution to India’s GDP has grown significantly
from 1.2% in 1999-2000 to around 4.8% in FY06, and has been estimated to cross 5% in FY07. The sector has been growing at an annual rate of 28%
per annum since FY01.

Indian IT companies have globally established their superiority in terms of cost advantage, availability of skilled manpower and the quality of services.
They have been enhancing their global service delivery capabilities through a combination of organic and inorganic growth initiatives. Global giants like
Microsoft, SAP, Oracle, Lenovo have already established their captive centres in India. These companies recognise the advantage India offers and the
fact that it is among the fastest growing IT markets in the Asia-Pacific region.
 Summarising some key highlights of the sector in FY06:

 Software and services exports were estimated to have grown by 32% in dollar terms to exceed US$ 23 bn.
 ITeS-BPO exports were estimated to touch US$ 6.3 bn, a growth of 37%
 IT-ITeS export revenues from engineering and R&D services, offshore product development and made-in-India software products touched an
estimated US$ 3.9 bn from US$3.1 bn in FY05
 Sales of Personal computers crossed 4.7 mn units; a growth of 20% compared to 3.6 mn units sold in FY05
 As of Dec 06, around 440 Indian companies had acquired quality certification with 90 companies certified at SEI CMM Level 5, higher than
any other country in the world
 The total number of IT and ITeS-BPO professionals employed in India was estimated to have grown to 1,293,000 from 1,058,000 in FY05

Industry Structure

The size of the Indian IT industry, according to NASSCOM, has been estimated to be around US$ 47.8 bn. The Indian IT industry can be broadly divided
into two markets: domestic market and exports market. The exports market constitutes the largest segment accounting for 75% of the total revenue
generated by the Indian software industry.

The domestic IT market is broadly divided into the following four segments: IT Services, software segment which includes engineering and Research &
Development (R&D) services, IT-enabled Services and Business Process Outsourcing (ITeS-BPO), and Hardware. While IT Services accounted for 34% of
the total revenue generated by the domestic market in FY06, the Engineering Services, R&D and Software Products segments together accounted for
10% of the revenue. The ITeS-BPO segment, on the other hand, contributed 7%. Hardware is the dominant segment with a share of about 49%. The
domestic IT market grew at a CAGR of 21.9% during FY02-06 to touch US$ 13.2 bn, and is projected to grow to US$ 15.9 bn in FY07, registering a
growth of 24% y-o-y.

The exports market is dominated by the IT services market holding a share of 56.4% in the software and services exports in FY06, followed by the ITeS-
BPO segment with 26.7% share and the software products and engineering services segment with 16.9% share.

The Indian hardware industry is at present estimated to be in the proportion of 30% domestic, 1.25% exports and the remaining being imports. The
domestic market itself offers tremendous potential for hardware companies, thus having very few companies venturing into hardware exports. Imports
of IT hardware which form a large component of the industry are mainly from Taiwan, China and Korea. Lately, however, MNCs in the hardware segment
have been viewing India as a hub for setting up hardware manufacturing facilities, for instance Dell.

India’s IT Industry (US$ bn)

Source: NASSCOM

IT Services Exports
 Indian IT Services exports grew from US$ 10 bn in FY05 to US$ 13.3 bn in FY06, registering a growth of 33.4%, and is further expected to reach US$
18.1 bn in FY07, posting a growth of 36%. Revenue from ‘projects’ dominated the IT Services exports with a share of 58%, with outsourcing and
support & training activities accounting for 33% and 9% respectively.

Source: D&B Research

Within the ITeS-BPO segment, Customer Interaction Services (CIS) account for nearly India’s IT Exports XIV 45-50% of the total ITeS-BPO services
exports while finance & accounting contributes for the remaining 40-45%. Human resource and other high-end knowledge-based processes account for
2% and 8-10% respectively.

The Software product, Engineering services and R&D segment contributes around 17% of the software and services exports. India is well positioned in
the engineering and R&D services segment. Apart from Indian companies offering these services, several foreign companies (both captive and third
party) are also setting up base in India to provide these services. Overseas companies operating in sectors like high–tech, telecommunications,
automobile, aerospace, heavy machinery, construction and industrial products are looking at off-shoring their engineering and R&D related work to
India.

Few important characteristics of the Indian IT sector include:

 Export intensive: Ever since the industry’s evolution, exports has been the major contributor to the industry.
 Concentration on Low-end services: Low-end services such as customised software services and maintenance have been the key strength of
the Indian IT companies. These companies are now however moving up the value chain offering end-to-end solutions to clients.
 Labour intensive industry: The very nature of the services offered by the industry makes human resources a significant driver for the
industry.
 Fragmented industry: D&B’s inhouse database has identified over 8,000 companies which operate in the IT space in India, offering a wide
range of software products and services. A large number of these companies are unorganised players
 Skewed concentration: The revenues of the top four companies, TCS, Infosys, Wipro and Satyam, including income of their subsidiaries,
account for around 22% of the overall industry. This skewness is all the more pronounced in the case of software services.

Emerging Trends in the Indian IT Services Industry

While the global IT players are aggressively scaling up their operations in India, due to the advantages that the Indian industry offers, the Indian IT
companies are also preparing to tap the global market. The companies are witnessing significant change with regard to their service offerings and
geographical concentration. Today, companies are expanding their service offerings from application development and maintenance to high end services
like testing, consulting and engineering designing. The global delivery model has not only facilitated the companies in delivering quality of work but also
helped them to control costs.

Emerging IT Services Dynamics

 Source: D&B Industry Research Service

Over the years, the Indian companies have positioned themselves well to reap benefits of the emerging scenario in the IT sector.

New Service Offerings

The Indian IT companies are expanding their service offerings to provide a complete basket of services to their clients. These new services include IT
consulting, testing, business process management and IT infrastructure services, which in a way allows the IT companies to de-risk their business from
pricing pressures and enter into newer areas which provide them higher growth and profitability.

Larger Deal Size

Indian IT companies have successfully scaled up operations and made a mark in the global outsourcing market, evident from the large deals bagged by
the Indian IT companies in the past one year, including the British Telecom-Tech Mahindra deal which was worth US$ 1 bn, the Pearl Insurance-TCS deal
(£ 486 mn), the Skandia-HCL Technologies deal (US$ 200 mn) and the Kimberly-Clark-TCS deal (US$ 100 mn). Most of the deals bagged by the major
companies were in the Banking and Financial Service space which reiterates the growth in this vertical. As per the data compiled by Technology Partners
International (TPI), the Asia Pacific region witnessed a significant increase in total deals amounting to US$ 10 bn in 2006 from US$ 6.1 bn in 2005.
Indian companies bagged contracts (above US$ 25 mn) worth US$ 2.7 bn in 2006, with a market share of 25% in the Asia Pacific region.

Growing presence of MNCs

Cost arbitrage and the availability of a large talent pool has attracted several MNCs to India. Big players like IBM, Accenture, Capgemini and Oracle
among others have not only increased their headcounts in India but also outperformed their global performance in terms of revenue growth. Their
Indian operations are witnessing strong growth as compared to their global business. Some of the major global companies like Intel, IBM and CSC are
cutting jobs abroad and shifting their base to India.

Investment Plans of MNCs in India

Source: D&B Industry Research Service

 Emerging Markets: In terms of geographical contribution, the US continues to remain the key market for Indian IT companies, accounting for 67.2%
of the software and services (including BPO) exports from India. However, Europe is also emerging as an important market for the Indian IT industry,
considering the fact that the share of exports to Europe from India increased from 22.2% in FY03 to 25.1% in FY06. After the US, Indian companies are
looking at the European region as a potential market for exports and also to expand their global presence. Mergers and acquisitions has been one of the
routes that the Indian companies have adopted to enhance their presence in European markets.

Changing Growth Drivers: There has been a change in the revenue composition of companies in recent years. The revenue contribution of high-
growth segments such as infrastructure management services, package implementation, testing and consulting has witnessed a continuous increase.
This is in sharp contrast to the earlier trend wherein almost all companies were largely dependant on the Custom Application Development and
Maintenance (CADM) services segment for their revenues. Today, the share of CADM has decreased to 49% in FY06 from 80% in FY01. Thus, newer
service lines are not only enabling Indian companies to increase their sales by cross-selling to their existing customers, but also improving their average
billing rates and recognition of being end-to-end service providers.

New End-users: In terms of user industries, the BFSI and hi-tech/telecommunication industries remain the leading verticals for the Indian IT
companies. Together, these sectors account for 58% of the Indian IT-ITeS exports. Though these verticals have good growth potential, other sectors
such as manufacturing, retail, healthcare, utilities, etc., are also emerging as promising segments for the Indian IT companies. While the BFSI sector has
the potential to provide large size contracts to the IT companies, the manufacturing sector can provide large number of deals/assignments to the Indian
players.

Presently, the Indian IT companies are on a hiring spree which indicates their bullishness on their order flows. All the major players have increased their
manpower by 15-50%, and the trend is expected to continue further. As a result, the companies are expected to scale up their operations. The Indian IT
companies are also vying for inorganic growth, with a quest for newer geographical areas, service offerings, domain expertise, customers and markets.

Concerns for the Indian IT Industry

Though demand conditions have been optimistic, the Indian IT sector is exposed to certain risks which may deter growth. An appreciating rupee,
anticipated slowdown in the US economy, shortage of skilled manpower, limitations in domestic infrastructure and competition from other global players
offering manpower at low cost like China, Philippines and Vietnam can have a negative impact on the performance of the Indian IT companies.

Besides, increasing activities of global MNCs in India will make difficult employee retention for Indian companies. NASSCOM opines that there will be a
shortage of half a million people in the IT and ITeS segments by 2009. With an industry attrition level hovering around 20-25% (often higher for smaller
players), companies are likely to offer an increase of 10-15% in salaries in the coming years.

On the financial front, wage inflation of 10-15% and forex fluctuation can reduce the top line as well as the bottom line of the companies. Unless the
Government defers the withdrawal of tax incentives which is due to expire after 2009, IT companies operating out of the Software Technology Parks of
India (STPIs) are likely to witness an increase in their tax liabilities, which may reduce their profitability further.

Key Positives & Negatives for the Indian IT Industry

Some Acquisitions in the IT Space in 2006

 Executive summary
The Indian IT industry has shown rapid growth and continues to expand operations and presence in global markets. In the last five
years, the industry has grown by an average 29% per annum, and is expected to sustain the growth momentum. The industry is
estimated to touch US$ 90 bn by 2010. The vast opportunities opening up for the IT sector along with its fragmented nature
prompted us to initiate this study on ‘India’s Top IT Companies 2007’.

A striking feature about the IT industry that came to fore during the exercise was its vastness. For this maiden publication, we began
with an initial database of over 8,500 companies that were operating in the IT space. Of these, 182 companies feature in the
publication; contingent on direct response received from the company, or authenticated data available in the public domain.

The companies profiled in the publication accounted for 45% of the Indian IT industry, in terms of revenue, in FY06. There is a high
concentration among the top 10 companies, which together accounted for 68% of the total income of companies featured in the
publication, and 31% of the total IT industry. In terms of employee count, the publication covers over 32% of the total IT employee
size.

In the list of 182 companies, 44% of the companies are into software product, and may have associated IT services or ITeS-BPO operations. Around
25% of the companies have a presence in the hardware segment and may have associated IT services or software development. Another 20% are only
into IT services while the remaining 10% are operating in the IT services and ITeS-BPO segment.

Of the 182 companies, 67% of the companies were servicing the BFSI segment, 55% telecom and 54% the manufacturing vertical. Government &
defence and healthcare & life sciences were the other major verticals in which around 43% of the companies had a presence. In terms of service
offerings, 83% of the companies offered more than one service. More than 50% of the companies offered more than three services, especially in the
areas of custom application development, application management, system integration and IT consulting.

Location wise, Bangalore, Delhi (NCR Region), Mumbai and Chennai continues to be the most favoured destination for IT companies to carry out their
operations. The survey revealed that more than 50% of the respondents were ready to expand their operations to Tier-2 cities.

Going forward, we expect the IT industry to remain on the growth trajectory. Though foreign exchange fluctuations, availability of skilled resources and
wage inflation are likely to add pressure on the growth and profitability of the sector, volume growth would continue in the near future.

India’s Top IT Companies 2007 has attempted to capture the essence of India’s IT sector. D&B India is confident that the publication would provide
the right platform, and will continue to endeavour towards recording the changing dynamics in the IT industry for posterity.

Methodology
The foremost criterion for selection of Top IT Companies is based on the condition that the company should necessarily operate in the software
development – packaged software, software services or hardware segment. Pure ITeS-BPO companies have been excluded for the study. However,
companies which are into software or hardware, and also have an associated BPO operation have been included.

The initial selection of the company data set was based on the list compiled from various sources, including the internal D&B database, listed companies
and IT industry associations especially NASSCOM and MAIT. From this list, the pure play ITeS-BPO companies were omitted. The companies short-listed
were then sent a detailed questionnaire seeking basic information on the company. Companies with confirmed data of having a turnover above Rs 100
mn have been featured in this publication.

No distinction has been made between the large companies and their subsidiaries – parent companies and their subsidiaries have been treated at par for
the study. Companies with negative net worth and those declared financially sick by the Board of Industrial & Financial Reconstruction (BIFR), as
available on their website, have been eliminated. Also excluded are listed companies that were declared as part of the Z group. The information
contained in this book is sourced and compiled from questionnaires circulated and administered by D&B India, telephonic interviews, and company
authenticated information available in the public domain, like company annual reports, websites and the Registrar of Companies. Additionally, mass
media channels such as advertisements in leading news dailies were used to invite participation in the publication.

Every effort was made to ensure that companies respond to the questionnaire. However, in the eventuality that a company has not responded with
critical data, and/or information which is not available in public domain, such companies have not been included in the publication. This is to ensure that
all information contained in this publication is verified and authenticated. The companies profiled in this publication have been listed on various
parameters, viz., Total Income, services offered, verticals serviced, location and employee size. However, this listing is not exhaustive, due to exclusion
of those companies that have not responded to the request for information.

Employee size and Total Income figures pertain to the latest financial year of the company. Total income is the sum of net sales and other income, and
refers to non-segmental, standalone operations (excluding income of subsidiaries) of the company. For foreign companies, the total income is for only
Indian operations and not global income.
 Employee count for companies where annual reports were available refer to the consolidated count as stated there–in, for the latest financial year.
Employee count for companies that have responded to the questionnaire have been stated as conveyed there-in. In such cases, if the staff strength for
Dec 06 was provided, the number has been tagged by an * in the profile, though this does not reflect in the listing pages.

A standardized format has been used for reporting the information on the companies. Dun & Bradstreet has compiled the management details of
companies from the data provided directly by the company, or from annual reports, or as per details provided on the company website as on mid-March
2007. The editorial team would appreciate if readers would keep Dun & Bradstreet regularly updated regarding any changes in their companies, as and
when it occurs.

Each company featured in the publication has been allotted its unique identification number (D-U-N-S ®  - Data Universal Numbering System). This will
help readers locate and obtain full-fledged information reports on these companies from the Dun & Bradstreet database.

The editorial team is confident that ‘India’s Top IT Companies 2007’ will prove useful. We would be pleased to receive your invaluable feedback and
suggestions, which we can incorporate in the next edition. Your satisfaction remains our goal in Dun & Bradstreet’s journey towards excellence.

Future outlook
Prospects for the Indian as well as the global IT industry are bright. According to the International Data Corporation (IDC), estimates for the global
industry indicate that IT spending would grow at an annual rate of over 7% during 2005-10 and cross US$ 2 tn in size. It also expects offshore spending
to touch US$ 110-120 bn by 2010. The success of the Global Delivery Model adopted by global IT companies and the increase in offshore spending by
the US and European countries like India are expected to reap rich benefits. Besides, the vast availability of English-speaking skilled workforce and the
lower cost of operation provide India an edge over others in the global IT market.

The size of the Indian IT industry (including hardware), currently estimated at US$ 47.8 bn, is expected to touch US$ 90 bn by 2010, of which over 65%
would account for software and services exports. The increase in the IT sector will be backed by the growth in offshore spending, preference towards
multi-vendor contracts and success of the Global Delivery Model.

Technology adoption by companies across sectors and rapid evolution of technology and applications will significantly drive growth in the IT sector.
Spending on IT is expected to increase across businesses with new sectors driving the new wave of IT growth. These expectations were also reflected in
our survey where 96% of the respondents believed that IT spending by companies will increase, while none expected it to decrease.

Source: D&B Research

The Banking, Financial Services and Insurance sector along with manufacturing and telecom are the traditional growth drivers for the Indian IT industry,
and continue to remain the key growth sectors. Apart from these, transportation & logistics and retail are emerging as fast growing verticals for the
industry.
 Source: D&B Research

Among the service lines, the conventional Custom Application Development continues to remain the dominant service line that is expected to witness
steady growth. This service line was identified as the most growing service with 53% of the responding companies identifying it as a key driver for the
next year as well. This service line accounts for 49% of India’s IT services exports and will continue to dominate. The other service lines witnessing
traction include IT Consulting, Infrastructure Management Services, Engineering & R&D and System Integration.

The Indian IT companies are expanding service offerings and entering newer geographies to strengthen their business model, reduce dependency on
single location and offer end-to-end solution to their clients. This expansion is likely to be fuelled through mergers and acquisitions. In 2006, the India-
based IT companies accounted for 91% of total acquisitions in the world, with a large number of the target companies located in the US followed by
India.

Source: D&B Research

In our survey conducted for the publication, of the companies that responded to our query on the future growth strategy to be adopted, more than 51%
of the companies indicated that they would grow organically. An equal number of companies indicated taking either the inorganic growth path or both.
Nonetheless, mergers and acquisitions will continue to remain the most preferred strategy among the IT companies for the near future as this would be
the fastest way to increase clientele, entry/expand into new geographies, increase product/service offerings and gain specialisation.

Availability of skilled human resource remains a key concern for the industry. The Indian IT companies spend around 35-45% of their revenue on
employees and forms one of the most important factors impacting operating margin. Nevertheless, despite the continuous hike in employee costs,
average cost per employee for Indian IT companies remain much lower than per employee cost prevailing in the developed countries like US and UK.
 Source: D&B Research

Factors impacting employee cost include demand-supply gap, high attrition rate and increasing presence of MNCs in the domestic market. Software and
services companies are trying to control cost by hiring freshers and training them in-house, which also takes care of quality issues. Training and
development will remain the key to developing skilled human resources for IT companies.

Source: D&B Research

Growing orders coupled with increasing activities of MNCs will accelerate the demand for skilled manpower and retention of employees. Under these
circumstances, managing employee cost will remain a key challenge for the Indian IT companies. Thus, it is believed that Indian IT companies will
continue to face an average wage inflation of 10-20% annually at various levels.

Financial analysis
We have attempted to understand the nature of the Indian IT industry through a financial analysis of a sample of listed companies. This section of
provides a brief overview of the current and past financial performance of these listed IT companies.

The sample selected for this analysis comprised of listed IT firms with sales turnover of over Rs 100 mn. The chosen analysis set accounts for close to
60% of total Indian IT Industry sales turnover as given by NASSCOM, hence is fairly representative.
 The graph below depicts the cumulative contribution of the top companies of our sample to the total IT industry sales turnover.

Source: CMIE Prowess Database, NASSCOM, D&B Research

The graph reveals that the top 50 firms in our sample contribute over 50% of the total Indian IT Industry turnover.

The IT industry has been logically divided into 3 categories based on the net sales turnover.

 Large size firms (> Rs 20,000 mn)

 Medium size firms (Rs 2,000 – 20,000 mn)
 Small size firms (< Rs 2,000 mn)

A brief profile of the three categories, with respect to our sample is shown below:

Source: CMIE Prowess Database, D&B Research

68% of our sample comprises of small size firms, which account for 7% of the total sample sales turnover. A quarter of our sample is medium size firms,
which also account for a quarter of the sample sales. Large size firms contribute close to 70% of the sample turnover.

Sales Growth: As per NASSCOM, IT Industry (IT Services and hardware) grew by 27% in 2005 and by 28% in 2006. As can be seen all IT companies in
our sample set enjoyed sales growth in excess of the industry average with the exception of medium sized companies in 2005 and small sized
companies in 2006.
 Source: CMIE Prowess Database, D&B Research

Net Profit Growth: The Profit after Tax (PAT) of the IT companies has registered strong growth with the small IT companies registering the highest
growth. Our sample as whole registered a growth of 65% in 2005 and 39% in 2006.

Source: CMIE Prowess Database, D&B Research

The asset base of the sample set grew by about 30% annually from 2004 to 2006. Large and medium firms contributed 60% and 25% respectively to
asset growth.
 Source: CMIE Prowess Database, D&B Research

Cost Structure & Profitability

Source: CMIE Prowess Database, D&B Research

A significant portion of the overall costs for large firms is in the form of personnel expenses that accounts of 42.5% of the net sales. This has grown
from 38% in 2004. However other expenses have come down from 19.5% in 2004 to 15.8% in 2006. PBIT PBT and PAT as a percentage of sales have
remained stable at around 25%, 22% and 18% respectively from 2004 to 2006.
 Source: CMIE Prowess Database, D&B Research

For medium sized firms the share of personnel cost as a percentage of sales is lower than large sized firms. Wage cost has increased from 35% in 2004
to 38% in 2006. Sales general and administrative (SGA) expenses have gone down from 38% in 2004 to around 15% in 2006. SGA expense ratio is still
higher compared to larger IT firms by about 300 - 400 basis points. PBIT, PBT and PAT margins for medium sized firms are lower than large sized firms
by about 800 – 1000 basis points.

Source: CMIE Prowess Database, D&B Research

For smaller firms personnel expenses drops further. SGA expenses as a percentage of sales is much lower compared to medium sized and large sized
firms. This can be attributed to the small, concentrated group of customers that these firms cater to whereby the client servicing costs are lower. A
significant cost component is by way of other operating expenses and depreciation expense that accounts for greater than 45% of sales. The PBIT, PBT
and PAT margins for FY06 are comparable to medium sized firms. The differential in net profit margin between small sized and medium sized firms has
narrowed from 8% in 2004 to about 1% in 2006.

Return Measures

a. Return on Networth:
 Source: CMIE Prowess Database, D&B Research

Return on net worth (RONW) measures the return on the shareholders equity. Large and small IT companies have shown increasing return on net worth
over 3 years with the large companies showing the largest return. The medium sized companies have shown a marginal decline over the three years.

b. Return on Capital Employed (ROCE):

Source: CMIE Prowess Database, D&B Research

Return on Capital Employed (ROCE) is used as a measure of the returns that a company is realizing from its capital employed. ROCE is defined as the
ratio of Profit before Interest and Taxes (PBIT) to capital employed. Capital employed is calculated as Total Assets less Current Liabilities.

The large companies seem to be deploying capital much more efficiently than the medium and smaller sized companies. ROCE for large sized has grown
consistently over the past three years. Small firms have shown a rising ROCE trend implying that these firms are also improving their capital utilization
efficiency. Medium sized firms have shown a marginal drop in capital deployment efficiency during the same period.

Capital Structure

In the IT industry, borrowing seems to play a relatively small part in the total funds deployed for operating purposes and for capital expenditure. Most of
the operations are funded through internal accruals. The larger the company size, the higher the share of internal accruals in the total liabilities. At no
point in any year does the share of internal accruals to total liabilities fall below 60% for medium and large companies. For the smaller companies
financing internal and external growth out of their relatively small earnings is difficult. Therefore these companies have a higher proportion of debt.
Source: CMIE Prowess Database, D&B Research

Source: CMIE Prowess Database, D&B Research