2
INDEX
Executive Summary
Overview
• Evolution of Indian IT Industry
• Current Industry Size
• Domestics Industry vs. Exports (FY2013)
• Industry Growth Drivers
• IT Exports
• Domestic IT Industry
• Porter’s Five Force Analysis
Takeover Track
• Acquisitions to play a key role in growth
• Key Acquisitions by Indian IT Player
SMAC as a game changer
Common Stock Comparison
3
Despite the economic uncertainty around the globe, the Indian IT-BPM (Information Technology –
Business Process Management) sector has maintained its growth with a CAGR of 11.5% over the
last five years. 2012 was a land mark year for the Indian IT-BPM sector with revenues crossing the
US$ 100 billion mark
The Indian IT-BPM sector remains a high impact sector and has played an important role in putting
India on the global map. It accounts for 8% of India’s GDP and gives employment to 9.5 million
people
The first $100 billion revenues were achieved due to India’s arbitrage advantage and the linear model
for revenue generation, the next phase however will be different
Exports accounted for more than 70% of revenues in 2012 and the US remained the favorite
outsourcing destination for the Indian IT sector. Exports to US accounts for 61.60% of the total
exports, followed by Europe which account for 28.50% of the exports. Banking and Financial Service
is a biggest segment for the exports and accounts for 41% of the total exports
Going forward, as the linearity in the industry diminishes, the Indian IT companies will have to move
up the value chain and provide their clients with quality solutions in addition to the low cost
advantage. The companies need to shift from standard ‘lift and shift’ enterprise services to enterprise
solutions which impacts not only the cost, but also revenues, profit margins and cash flows
Solutions incorporating SMAC ( Social, Mobile, Analytics & Cloud) are driving this change
According to a recent survey by Gartner, Analytics, Mobile technologies and Cloud computing have
become the three top most priorities of CIOs world over and these services are set to change the
face of the global IT-BPM market drastically over the course of the next few years
The Indian IT players need to capitalize on their well established IT/BPM market presence by
increasing their service portfolio beyond the standard enterprise services to SMAC services
EXECUTIVE SUMMARY
4
By early 90s, US based companies began to outsource work due to low cost and skilled talent pool of India
IT Industry starts to mature with increased investment in R&D and infrastructure
India seen as product development destination
Number of Indian firms grow in size and start offering complex services like product management, go-to market strategies etc.
Western firms set up captive units in India
Indian firms become Multi National Companies with delivery centers across the globe
Indian firms make global acquisitions
Industry employs 3 million people directly and gives indirect employment to ~9.5 million
OVERVIEWEvolution of Indian IT Industry
Pre -1995
1995-2000
2000-2005
2005 onwards
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OVERVIEWCurrent Industry Size
The Indian IT industry has played a vital role in putting India on the global map. It has evolved dramatically over the
last decade it terms of its scale, key service offerings and value provided to its customers. Having grown at a CAGR
of 25% during FY2000-13, the sector has become one of the dominating forces in the global IT-BPM market
As per NASSCOM (widely acknowledge as the go to Industry body for IT), the industry touched revenues of US$ 108
million in FY13 with exports at US$ 76 billion, accounting for more than 70% of the total revenues
IT-BPM is a high impact sector in India as is accounts for ~8% of the countries GDP and ~24% of the total exports of
the country
The Indian IT industry can be segregated into IT Services, Business Process Management, Engineering and R&D
& Software Products and Hardware with each having the following share in the total industry :-
62.9 69.3 74.288.5
100.9 108.4
0.0
20.0
40.0
60.0
80.0
100.0
120.0
FY2008 FY2009 FY2010 FY2011 FY2012 FY2013E
US
D in
Bil
lio
ns
Indian IT-BPM Industry (FY2008-13E)
CAGR - 11.5%
IT Services52%
BPM19%
Software products
and ER&D17%
Hardware12%
Total Industry Size ~ $108 billion
Indian IT-BPM Break-up (FY2013E)
6
OVERVIEWDomestic Industry vs. Exports (FY2013)
Source: NASSCOM
0.4
14.1
17.8
43.9
12.9
3.8
3.1
12.4
20.0 10.0 0.0 10.0 20.0 30.0 40.0 50.0
USD in billions
Domestic Exports
Indian IT Industry
(US$ 108 billion)
IT Services
(US$ 56 billion)
Business Process Management
(US$ 21 billion)
ER&D & Software
(US$ 18 billion)
Hardware
(US$ 13 billion)
7
OVERVIEWIndustry Growth Drivers
Source: NASSCOM
Components Growth Drivers
• Project based services
• IT outsourcing
• Support & training
• Applications and services built
around social, mobile, cloud &
analytics
• Customer Care
• HR
• F&A
• Procurement
• Platform solutions, bundling
BPM with analytics, mobile
engagement of business
processes
• Application development and engineering/design
• Software as a
service, technological
advances, low cost consumer
preferences
• Personal computers
• Servers
• Network equipment
• Storage and security
• Printers
• New users from rising
lower/middle class
Indian IT Industry
(US$ 108 billion)
IT Services
(US$ 56 billion)
Business Process Management
(US$ 21 billion)
ER&D & Software
(US$ 18 billion)
Hardware
(US$ 13 billion)
OVERVIEWIT Exports
Source: NASSCOM and Broker Research Reports in FY 2012-13
US61.50%
UK17.10%
Continental Europe11.40%
Hardware12%
ROW2.20%
Region Wise Exports (FY2013E)
Total Exports – $76.2 billion
BFSI41.00%
Telecom18.00%
Manufacturing16.00%
Hardware12%
Other15.00%
Vertical Wise Exports (FY2013E)
Total Exports – $76.2 billion
40.947.5 50.1
59.469.2
76.2
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
FY2008 FY2009 FY2010 FY2011 FY2012 FY2013E
US
D in
bil
lio
ns
CAGR - 13%
Indian IT-BPM Exports
IT Services58%BPM
23%
Software products and
ER&D19%
Hardware1%
Category Wise Exports (FY2013E)
Total Exports – $76.2 billion
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OVERVIEWDomestic IT Industry
22.0 21.9 24.129.0
31.7 32.2
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
FY2008 FY2009 FY2010 FY2011 FY2012 FY2013E
US
D in
bil
lio
ns
CAGR - 8%
Indian IT-BPM ExportsIndian IT-BPM Domestic Industry
IT Services39%
BPM10%
Software products and
ER&D12%
Hardware1%
Category Wise Domestic Industry (FY2013E)
Large Enterprises
47%
Consumers12%
Government15%
SMB26%
Region Wise Exports (FY2013E)
Total Domestic Industry – $32.2 billion
Total Domestic Industry – $32.2 billion
84% 84%
32%
16% 16%
68%
Hardware Software Products IT Services
Foreign Indian
Domestic IT-BPM market by Ownership (FY2013E)
Source: NASSCOM and Broker Research Reports in FY 2012-13
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OVERVIEWPorter’s Five Forces Analysis
ENTRANTS RIVALS BUYER POWER SUBSTITUTES SUPPLIERS
Threat of New Entrants Degree
Capital Requirement Low
Support of Government Policy Medium
Expected Retaliation High
Switching Cost
-Small Clients High
- Large Clients Low
Entering into the industry is not difficult and this is evident from the large number of players in the industry
Liberalized FDI policies, tax exemptions, basic infrastructure, subsidies etc. from the government has definitely
given a boost to the establishment of the industry in India
Government spending polices are also promoting the growth of the sector. The expected government spending on
IT is expected to be $4.78 billion in FY13-14
Venture Capitalists have also shown a keen interest in the Indian tech startups which have unique products/ideas or
are working on disruptive technologies such as Social, mobile, cloud and analytics, thus providing them with the
required capital in order to expand their businesses
Threats of new entrants is HIGH
162
335400
450
2005 2009 2011 2012
IT start-ups in India
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OVERVIEWPorter’s Five Forces Analysis
ENTRANTS RIVALS BUYER POWER SUBSTITUTES SUPPLIERS
Rivalry Degree
Industry Concentration High
Industry Growth High
Diversity of Rivals High
Intermittent Over Capacity Medium
Product Differences Low
Fixed Cost Medium
Entry Barriers Low
9%
6%5% 6%
4%
Market Share of Top 5 Players (FY2012)1
With large number of small and medium players together with a few big domestic as well as international players, the
industry is marked with high competition
Top five* companies account for ~33% of the total industry revenues
With decreasing margins, increasing number of firms and the ever changing requirements of clients, the present
industry participants need to be at their innovative best in order to survive and grow
Degree of rivalry in the industry is HIGH
1. Angel Broking Research Report
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OVERVIEWPorter’s Five Forces Analysis
ENTRANTS RIVALS BUYER POWER SUBSTITUTES SUPPLIERS
Bargaining Power of Customers Degree
Switching Cost
-Small Clients High
-Large Clients Low
Differentiation of Outputs Low
Presence of Substitutes Medium
Industry Concentration relative to
buyer concentration High
Customers in the IT sector have a distinct edge relative to other industries given the numerous high quality options
available to them
Large customers have a comparative advantage in relation to small customers in terms of switching cost (no player
wants to lose a sizable contract given their long nature and visibility of revenue)
Increasingly competition is shifting the power towards the buyer making it difficult for the companies to survive
without a good strategy and differentiated product / service offering
Bargaining Power of Buyers is MEDIUM
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OVERVIEWPorter’s Five Forces Analysis
ENTRANTS RIVALS BUYER POWER SUBSTITUTES SUPPLIERS
Threat of Substitutes Degree
Relative Price Performance
of Substitutes High
Switching Cost Medium
Buyer Propensity to Substitute Medium
Information Complexity Low
Countries such as China, Philippines, South Africa, Vietnam, Korea, Eastern Europe and Israel are growing in the
field of IT outsourcing and are increasingly posing a threat to the Indian IT Sector (global outsourcing pie $400bn)
The Indian IT Sector needs to innovate constantly to have an edge over these countries
Threat of substitutes is MEDIUM
39
32
31
26
22
20
0 10 20 30 40 50
Beijing
Bangkok
Buenos Aires
Metro Manila
Bengaluru
Pune
Operating Cost per FTE for IT Services
(USD '000/per annum)
- Comparative cost advantage
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OVERVIEWPorter’s Five Forces Analysis
ENTRANTS RIVALS BUYER POWER SUBSTITUTES SUPPLIERS
Bargaining Power of Suppliers Degree
Differentiation of Inputs Low
Supplier Concentration relative to
the Industry High
Substitute Product High
Quality human resources is the largest requirement for the IT sector and low-cost availability of human capital has
been the reason that the Indian IT companies have been able to provide quality services to their clients
India’s talent base is expanding rapidly with an annual addition of nearly 4.74 million graduates and post graduates
The industry has now entered a non-linear phase, which means addition of new talent does not mean increase in
revenues
As competition intensifies for skilled professionals, employee costs could rise rapidly in the next few years (body
shopping cannot be the only play)
Threat of substitutes is Low
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TAKEOVER TRACKAcquisitions to play a key role in growth
• Over the past decade, India’s top software companies have
acquired foreign and domestic firms to increase their local
presence in the US and Europe, their main markets, or to acquire
employees with a specific skill set or strengthen their capability in a
particular sector
• Most acquisitions by Indian IT companies have not been very
expensive on a multiples basis and have been targeted at
penetrating new geographies, especially Europe
• Another driver of acquisitions by Indian IT firms is the large pile of
cash that many IT companies have been sitting on. At the end of
2012, Tier 1 Indian IT providers such as Wipro, Infosys and TCS
were sitting on billions of dollars each. With that much cash and an
improving macroeconomic environment, these firms will continue to
spend some of their reserves to buy companies that drive growth
as a way of delivering more value to their shareholders
• For instance TCS’s recently announced the acquisition of French
technology services company, Alti SA, for $97 million (Rs. 530 Cr.)
which is expected to provide TCS with an extra edge in the
European market. Through the acquisition TCS has brought in
1,200 employees and reputed clients such as Banque De
France( French Central Bank), BNP Paribas, Credit Agricole, and
Societe Generale among its clients in banking sector besides
others such as Air France, L'Oreal and telecom company Orange
• We will continue to see a rising wave of M&A in FY2013-14 in the
sector both on the domestic and overseas front
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TAKEOVER TRACKKey Acquisitions by Indian IT Players
Co. Name Recent Acquisitions
TCS
Infosys
Wipro
HCL
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Common Stock ComparisonUSD in millions
Source : Company Filings, Bombay Stock Exchange (Exceptional items have not been adjusted)
Note : 1. Market Data as of 30th April 2013 (Except for HCL which has a June end. Market data taken as of 30th June 2012)
2. Exchange Rate USD-INR = 54.38 3. Non- Operating income has been excluded from EBITDA and included in Net Income
Company
Name 2012 2013 2014E 2012 2013 2014E 2012 2013 2014E
$25.30 $49,524.91 ($1,347.25) $48,177.67 $8,989.60 $11,581.23 $13,586.75 $2,654.07 $3,316.81 $3,895.16 $1,914.62 $2,558.83 $2,985.72
41.08 23,591.07 ($4,320.52) 19,270.56 6,202.32 7,419.11 8,893.50 1,970.24 2,125.05 2,543.97 1,528.98 1,732.14 1,901.18
6.40 15,754.11 ($2,033.07) 13,721.04 5,860.47 6,881.06 9,044.33 1,271.04 1,468.76 1,821.48 1,029.38 1,226.27 1,361.81
13.26 9,228.58 ($57.62) 9,170.96 3,829.90 4,667.98 5,269.74 713.50 1,016.04 1,081.94 445.44 686.40 741.15
EV
Sales EBITDA Net Income
Share
Price Market Cap Net Debt
Company
Name 2012 2013 2014E 2012 2013 2014E 2012 2013 2014E 2012 2013 2014E 2012 2013 2014E
29.52% 28.64% 28.67% 21.30% 22.09% 21.98% 5.36x 4.16x 3.55x 18.15x 14.53x 12.37x 25.87x 19.35x 16.59x
31.77% 28.64% 28.60% 24.65% 23.35% 21.38% 3.11 2.60 2.17 9.78 9.07 7.57 15.43 13.62 12.41
21.69% 21.35% 20.14% 17.56% 17.82% 15.06% 2.34 1.99 1.52 10.80 9.34 7.53 15.30 12.85 11.57
18.63% 21.77% 20.53% 11.63% 14.70% 14.06% 2.39 1.96 1.74 12.85 9.03 8.48 20.72 13.44 12.45
Mean 25.40% 25.10% 24.49% 18.79% 19.49% 18.12% 3.30x 2.68x 2.24x 12.90x 10.49x 8.99x 19.33x 14.82x 13.25x
Median 25.61% 25.20% 24.57% 19.43% 19.96% 18.22% 2.75 2.30 1.95 11.82 9.21 8.03 18.07 13.53 12.43
Maximum 31.77% 28.64% 28.67% 24.65% 23.35% 21.98% 5.36 4.16 3.55 18.15 14.53 12.37 25.87 19.35 16.59
Minimum 18.63% 21.35% 20.14% 11.63% 14.70% 14.06% 2.34 1.96 1.52 9.78 9.03 7.53 15.30 12.85 11.57
PAT Margin EV/Sales EV/EBITDA P/E EBITDA Margin
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SMAC as a Game ChangerOur Next Focus
Services incorporating Social, Mobility, Analytics and
Cloud (SMAC) are reshaping the traditional way the
IT-BPM industry has been providing services till now
These individual technologies and platforms which
have risen during the past few years have shown
immense potential, but are barely understood
While each of these four components have been
evolving individually, companies are beginning to
treat them as an integrated whole
The convergence on these technologies means
dismantling the traditional business design: No
longer is it required to keep people and information in
the same location or to spend big money to support
information sharing, communication and
collaboration
These provide an opportunity for the Indian IT
players to move into a higher margin business as
compared to the typical IT contracts
SMAC can turn out to be a game changer for the
$108 billion Indian IT industry and keep India ahead
of its competition.
The first $100bn of revenues in the IT Industry took
over a decade, the next might happen in a matter of
a few years if the IT players can understand, adapt
and leverage these disruptive technologies quickly
Stay tuned for our next report “ The Game Changers for the Indian IT Industry” which will highlight the impact and immense potential of these 4 disruptive technologies
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19
How Dinodia Capital Advisors can help
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Indentify businesses to be acquired or sold
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Help your business find the most suitable technology partners
Provide advice on any related transaction terms, valuation and pricing
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Email: [email protected]
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