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Industry Snapshot - Information Technology

  • Jul 7th, 2017

1.INTRODUCTION 

Information Technology Industry

The Information Technology Industry is one of the largest and fastest growing industries in the world. In the late 90's when the Indian economy opened up for the world market with the desire to attract foreign investment, Information Technology Industry within a very short span of time grew dynamically. In the current business ecosystem, the application of IT is in all the sectors of the country and plays a very important role in the development of the economy of the country. Within the last two decades, the emergence of IT industry can be clearly seen on the global stage and today it comprises around 12.3% of the global market. Indian IT industry is largely dependent on exports or outsourced projects and collects more than 60% of its revenue from the foreign clients. According to the Nasscom report, IT industry is going to create around 2.5-3 million new jobs by 2025, while some other analysis agency claims, that could go up to six lakhs. Some recent events like Brexit, US presidential election, turmoil in some of the top IT firms like TCS and Infosys have created a lot of buzz around this sector. However, these turmoils do not impact the importance of this industry. The contribution of IT industry to India’s GDP is about 7.7%, which makes this industry very important for the country’s economy.


2.INDIA’S STANDING IN THE WORLD         

  • Indian Software sector is predominantly export oriented and more than two-thirds of its revenue comes from exports.
  • Globally, India’s IT industry amounts to 12.3% of the total IT market in the world.
  • Being one of the major players in the IT sector of the world, India's IT industry has captured 56% of the global sourcing market.
  • For the Fiscal Year 2016-17, Information Technology sector's total turnover was $154 billion, including both exports and domestic revenue.
  • As compared to the fiscal year 2015-16, IT Industry added over US$ 11 billion in revenue in the last fiscal year 2016-17 and displayed a growth of 8.6% in constant currency and 7.6% in reported currency.
  • The global IT sourcing grew by 9%-10% YoY in FY16. Indian IT industry displayed marginal de-growth of 0.2% YoY in total global IT spend.
  • As compared to the fiscal year 2016-17,  the Indian IT-BPM industry grew by 9% in FY 2015-16 as per NASSCOM.

Groth in Export of IT Insudtry


3.INDUSTRY VS. GDP            

  • The contribution of the IT sector (consisting of hardware, software, and services) to the GDP of the country has significantly increased from the US $ 6 billion in 1997-98 to the US $ 154 billion in 2016-17.        
  • In a span of 20 years time, the contribution of IT industry to country's GDP recorded more than 6  fold increase of about 1.2 % in 1997-98 to 7.7 % in 2016-17.                 
  • Software and other related segments of IT are the major contributors to the increase in GDP.
  • The growth of IT industry in India is mainly due to its export revenues which were US$ 117 billion for FY 2016-17.
  • Along with the export revenue, IT industry displayed a similar trend in the domestic market as well. The domestic revenue grew by 8.5% to reach US$ 37 billion in FY 2017.

3.1 Revenue of IT Industry in US$(billion)

Year/Segment 2012-13 2013-14 2014-15 2015-16 2016-17 CAGR (2012-17) %
Export 76.5 87.3 97.8 07.8 117 11.20
Domestic 19.2 19.0 21.0 21.7 37 4.78
Total 95.7 106.3 118.8 129.5 154 9.94

**Source: Nasscom

3.2 Export revenue segment wise ( US$ Billion)

Year/Segment 2012-13 2013-14 2014-15 2015-16 2016-17 CAGR (2012-17) %
IT services 42.9 49.2 55.3 61.0 66.0 10.59
ITes-BPO 18.3 20.4 22.5 24.4 26.0 10.34
Software, Engineering Services 15.3 20.0 20.0 22.4 25.0 13.97
Total IT-ITeS 76.5 97.8 107.8 107.8 117.0 11.20
**Source: Nasscom, E- Estimated

Sector wise breakup of export in IT Industry

3.3.Segment wise Domestic revenue (in INR Crores)

Year/Segment 2012-13 2013-14 2014-15 2015-16 2016-17 CAGR (2012-17) %
IT services 66300 72721.6 81662 89562 100500 8.68
ITes-BPO 117500 19593.8 21490 23364 26800 12.53
Software, Engineering Services 20500 22468.8 25788 27907 33500 13.22
Total IT-ITeS 104700 114784.2 128940 140833 160800 8.96

**Source: Nasscom, E- Estimated


4.SEGMENTS OF IT INDUSTRY

India's IT industry can be divided into six main components, viz.

  • Software : Applications for productivity, Business, Networks, Systems, Security, Mobile Apps
  • IT services: Deployment, Integration, Custom Development, Break/fix, Managed Services.
  • Infrastructure : Internet backbone, Telecommunications Network, Cloud Data Centers.
  • Engineering and R&D: Data, Document, Voice, Video, Images, Social Streams
  • ITES/BPO (IT-enabled services/Business Process Outsourcing): Commerce, Communication, Collaboration, Automation, Governance.
  • Hardware: Computers, Servers, Storage, Mobile Devices, Printers, Network Equipment.

5. TOP IT PLAYERS IN INDIA

COMPANY           

NET SALES (Rs. Cr)

NET PROFITS (Rs. Cr)

COMPANY                 

NET SALES(Rs. Cr)

NET PROFIT(Rs. Cr)

1. TCS

460,025.96

23,653.00

6. Oracle Fin Service

30,455.25

928.85

2. Infosys

213,501.01

13,818.00

7. L&T Infotech

13,406.89

938.13

3. Wipro

126,568.53

8,099.00

8. MphasiS

11,427.42

458.37

4. HCL Tech

121,419.27

4,733.68

9. Mindtree

8,887.71

489.10

5.Tech        Mahindra

37,927.21

3,220.00

10. Hexaware Tech

7,310.54

356.07

**Net Profit  and Net Sales as per the latest Profit & Loss Account available.

5.1.The Revenue Growth of Top 5 IT companies from FY2011 - FY 2016

The Revenue Growth of Top 5 IT companies from FY2011 - FY 2016

The Revenue Growth of Top 5 IT companies

 


6.FACTORS AFFECTING INDUSTRY

  • Currency Exchange Rates: The valuation or devaluation of Rupee is a factor which directly affects the Indian IT industry, as a major part of revenue comes in foreign currency only. Even a small change in valuation of Indian rupee creates a lot of disruption in this industry.
  • Automation: The world has become technology driven and on each day a new technology comes into the market. To keep updated with the current technology, IT industry spends a lot to increase the skill of their workforce and as a result, are forced to decrease the operational cost, work with low margins ultimately, leading to job cuts. 
  • Foreign Policy: There is a haphazard political situation in many economies of the world due to which IT industry is always at a higher risk, as it is an export-oriented industry. Sudden changes in foreign policy make a huge impact on the operations of this sector.
  • Foreign Direct Investment (FDI )Regulations: FDI plays a key role in this sector. R&D is the demand of present situation of this industry which needs a huge flow of investment. Cloud, Artificial Intelligence are now become the basic need for any new development. No doubt It industry industry attract many investor because of its highlt rate of return in last two decade but due to its slow growth rate in last few year makes life tough for the industry to attract investors.

7.BREXIT EFFECT

  • Europe is the second largest market for the Indian IT-BPM industry, constituting almost 30% of the industry’s export revenue. For the fiscal FY 16, overall IT exports was about $108 billion out of which 62% was contributed by the US, 17% by UK  and 11% by continental Europe.
  • Indian IT companies use Britain as the hub of their operations in Europe to expand their businesses in continental Europe using Britain. But after Brexit, Indian IT companies may need to establish separate headquarters/operations for EU, leading to disinvestment from UK and diversion of activity from UK to EU.
  • Brexit will lead to a disruption in the functionings of major IT companies of India. They will have to shift their labour, need to make changes in the financial system, and have to deal with change in currency .
  • Companies that may be affected by Brexit:

BREXIT EFFECT

  • In the longer run, India-UK economic relationship may strengthen due to Brexit. UK  may seek a partner to compensate for the loss due to ruling out of preferential access to EU markets. This exit will lead to uncertain situaton in UK as well as the EU market which can become an opportunity  for India to prepare UK for an uncertain future, re- shape its economy and enable the change.

  • At present, there are 800 Indian companies employing 110,000 individuals in the country (as of March 2016), and India’s focus is on innovation, entrepreneurship and high-end work which can render the IT companies a very attractive choice for the talent pool standpoint, and in terms of market access.

BREXIT EFFECT Fig 2


8.TRUMP EFFECT

  • The $108 billion software export industry that employs over four million people gets over 62% of their revenues from the North American market.

  • Indian IT companies are among the biggest beneficiaries of the H-1B visa program, which sends hundreds of Indian tech professionals to the United States. H-1B visa allows foreign professionals to work in the US.

TRUMP EFFECT

  • There is a growing concern that India’s $154 billion information technology industry, which relies heavily on exports to the United States, could slow down and competition may become ineffective if the Trump administration tightens the rules on hiring cheap and skilled foreign workers to work in the US.

  • In the previous month, a Bill was introduced in the U.S Congress raising the minimum salary for the positions which are used to grant the H-1B visa scheme from $60,000 to $100,000 per year. With the increase in minimum salaries, Indian IT companies are likely to face challenges in the movement of labour as well as a hike in operational costs.

  • Looking into all this, several Indian IT companies are preparing to accelerate recruitment of local employees in overseas markets. An ambiguity is there that election rhetoric of President Trump about protectionism of US Job for their own people may become reality and these companies have to pull back their work force from the host country.

  • Visa troubles for the Indian IT sector are not confined to the United States. After the US move to tighten visa norms, Australia announced scrapping of 457 visa used largely by Indian IT professionals.

  • With the UK already hiking the minimum wage requirement to 35,000 pounds for tier-2 visa immigrants, this latest move by the US will act as a definitive dampener to the Indian outsourcing industry.

9. JOB LOSSES IN IT INDUSTRY

  • Indian IT and BPO sectors employ close to four million people in over 16,000 companies.

  • There is a disruption all over the globe, IT industry is at a higher risk and risk of job loss of the middle management is at maximum.

  • Many reports claimed that the job cuts in IT sector would be around 1.75 lakhs. For the next 3 years, there would be 2 lakhs job cut annually as the IT companies are still not prepared to adapt to new technologies.

  • One of the reasons for such huge job cuts as per McKinsey & Company report stated that nearly half of the IT sector professionals are not trained as per the requirements of the newer technologies. Other reason presented by many IT veterans is the "Rigorous performance appraisal process" on a regular basis to align company's workforce with business objectives, strategic priorities of the company, and client requirements are also the reasons for Job Losses.

  • The growth in digital technologies like cloud-based services is happening at a much faster pace and the companies are combining the learning of some of the new technologies and reskilling, however, they are unable to make their employees compatible with the new age technology at the same pace.

  • Earlier there was fixed price and time-and-effort models on which most of the Indian IT industry is based on but with the current global trend is that the IT services companies are being asked to switch to on-demand pricing model, which forces them to cut operational cost and ultimately leads to layoffs.

  • Joblessness is going to be real unless people learn new skills such as data engineering and building platforms.

JOB LOSSES IN IT INDUSTRY


10.INDIAN IT SERVICE INDUSTRY REINVENTION TO SURVIVE IN FUTURE

The Technology sector in the global market is changing at a rapid speed and Indian IT companies need to change their way of doing business and move out from their protective mode and think ‘bigger’ to stay relevant. In spite of pulling back from entering into new market or staying back with the old set of technologies with unskilled workforce who are not coping up with the changing technologies, this sector has to take tough calls to continue the growth graph otherwise, there will be huge opportunities lost and it will become very tough to book new orders with the clients. Indian IT industry mainly relies on its export revenue and since the growth of export revenue is slowing down if the companies do not change the conservative approach then there would be a loss of significant market share in the global market. Along with this, some other issue which the IT industry has to counter to reinvent and survive in future are:

10.1 Visa turmoil : Many of the young software engineers in India dream of going abroad to earn in foreign currency but with the current turmoil over the H1-B visa, they have to let go off their US job dreams. The protectionist attitude of many world leaders for the jobs of their own people has become louder after the United State's newly elelcted President, Donald Trump stands followed by other country's leaders like that of Australia.

H-1b Visas

10.2. Automation: De-growth in revenue due to automation cannot be ignored. Indian IT companies have to adopt more proactive atitute towards convincing clients on automation and sharing the cost benefit with them, else there is a risk of losing business to competitors.

10.3. Digital challenge: The worldwide IT services market is expected to grow by 4.2 % in 2017, up from 3.9 % growth in 2016. This expectation is based on the  investments made in the digital business, intelligent automation and innovation (according to Gartner. IDC). It is also predicted that by 2017, over 50 % of the expenditure of organisations will be for third platform technologies, like cloud computing, big data analytics, mobile computing and IoT (internet of things) . And by 2018, at least half of the IT spending will be on cloud applications alone. Indian IT exporters will be left out with nothing if they do not quickly adapt to the changing market.

10.4. Consultancy: The market leaders in the global IT space today, be it Accenture, IBM or Cognizant Technology Solutions, have a strong consulting arm. As compared to the total market about 13 % of the overall IT services market is made of consulting. This segment of the market is growing at a faster rate as compared to the overall market.But Indian IT service companies have not built a strong arm in this particular field and still struggling to build a  strong consulting brand for themselves and so there is a need to work in this regard.

10.5. Saving Cash: While the large technology players in the global market are on an acquisition mood, Indian IT majors are sitting on piles of cash. Last year (2015-16), TCS reported a total of ₹29,000 crore of liquid funds in its balance sheet. On December 2016, the cash balance (with current investments) bloated further to ₹38,406 crore. Similarly, Infosys (₹30,480 crore) and Wipro (₹30,000 crore) too have a large hoard of cash.

Significant portion of assets


11.INVESTMENTS/ DEVELOPMENTS

  • There is a huge Foreign Direct Investment (FDI) inflow worth US$ 22.83 billion from April' 2000 to December' 2016 in the computer software and hardware sector in India .

  • Leading Indian IT firms like Infosys, Wipro, TCS and Tech Mahindra are diversifying their portfolios and offerings. These companies now showcase leading ideas in blockchain, artificial intelligence to clients using innovation hubs, research and development centres, in order to create differentiated offerings.

  • Google plans to set up its first data centre in India in the city of Mumbai by 2017, to improve its services to local customers. Google's target is to host their applications on the internet, and to give a stiff  competition to Amazon and Microsoft.

  • SAP SE, in partnership with the Associated Chambers of Commerce of India (ASSOCHAM), has come out with a resource center to share knowledge which will serve as a one-stop portal for all the businesses who are looking to adopt or migrate to technology that will make them future ready for the biggest taxation reform of Goods and Services Tax (GST).

  • Freshdesk has raised US$ 55 million in their latest round of funding in November 2016 . Freshdesk was one of the first companies from India to offer Software-as-a-Service (SaaS) to global companies. The fund raising event was led by Sequoia Capital India and existing investor Accel Partners. This fundraising event makes the value of the company about US$ 700 million.

  • Reliance Industries Ltd (RIL) plans to set up entrepreneurship hubs in key cities and towns, and has set up a fund of Rs 5,000 crore (US$ 748 million), under the name of Jio Digital India Startup Fund, to invest in technology based startups.

  • The Government of India has allocated Rs 10,000 crore (US$ 1.5 billion) for BharatNet project under which it aims to provide high speed broadband to more than 150,000 gram panchayats by 2017-18.


12.CHALLENGES

  • As per Assocham, nearly 86% of the H-1B visas, which were issued for workers in the IT sector goes to Indian employees. After the uncertainty over H1-B visas which is a must to service US clients, it is now speculated that the 86% share would go down to about 60% or even less and this could become a serious threat for all IT companies, as these firms are hugely depended on the Outsourced projects.

  • Decreased opportunities for IT industry because of lowered investments due to the economic slowdown in various parts of the world.

  • India's top IT companies are facing difficulty in acquiring new clients. The businesses have explored automation, robotics and innovative technologies such as cloud computing and demand skilled and updated workforce to handle their projects for which Indian firms are not ready yet.

  • Increasing competition, pressure on billing rates of traditional services and increasing commoditization of lower-end services are among the key challenges forcing the Indian software industry to make a fast move in the software value chain.

  • The new digital technologies like social media, mobility, analytics, and cloud computing (SMAC) has changed permanently and the  way Indian IT firms do business with the existing workforce is finding dificulty to cope up  with these changes.


13.OPPORTUNITIES

Artificial intelligence: Consumers are becoming increasingly technology-conscious and are demanding products with built-in intelligence.          

  • Build India is the initiative taken by the government to focus on advanced technology-based developments and to create the Digital Innovation Hub.    
  • Digital Ecosystems is one of the areas which is to connect Startups with Enterprises and is in higher demand. 
  • Explore the newer markets like Japan, Germany, Middle East, Africa, and China with focus on Digital solutions. 
  • Government’s  Digital India initiative opens up a plethora of opportunities such as building the broadband infrastructure; creating identity solutions, payment systems, web or mobile based delivery structures and so on.
  • Cybersecurity is another key area of focus now-a- days with the growing events of malware attack like the  recent ransomware attacks in some countries.
  • Healthcare is undergoing digital transformation globally, and in a country like India, telemedicine and remote health will likely play a huge role in driving universal accessibility to quality healthcare and this may be a huge opportunity for IT industry to develop such infrastructure.
  • Smart Cities are another big area of opportunity for technology companies as part of Digital India.
  • The Indian government is emphasizing on better technology enabled delivery mechanisms for multiple government projects. With the new Digital India and Startup Indian initiatives being launched, the domestic market for software services has a bright future ahead with plenty of opportunity.

14. RELEVANT QUESTIONS

  • What are the major trends affecting the IT industry?

  • How do you see the differences between the Founders and Promoters of IT firms?

  • What is your opinion on hefty pay hike of Top Management on one side and Layoffs of hundreds of employees on the other side in the IT industry ?

  • Flushed with money and the newly-found independence, today’s IT staffers are known both for working late and partying hard. How do you justify this work culture ?

  • Will GST Impact the IT industry globally as Indian IT sectors have a considerable percentage of share in the global market?

  • What will be the impact of Brexit on IT industry and how is the industry likely to react after the complete separation of Britain from EU?

  • What is H1B Visa and why is there so much discussion about it?


15.LATEST NEWS


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