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Indian IT-ITES FY05 Results and FY06 Forecast
S. Ramadorai, Chairman NASSCOM, CEO & MD TCS
Kiran Karnik, President NASSCOMPress Conference, Bangalore
June 2, 2005
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FY05 results have exceeded last years forecasts
9.211.2 12.0
3.6
5.15.23.9
4.24.8
FY04 FY05P FY05
Domestic Market
ITES-BPO Exports
IT Software and Services Exports Overall software and services(exports + domestic) grew by 32%against a forecast of 25%
Exports grew by 34%
Strong growth validates the
economics of offshore outsourcing
Highest growth since the slowdown
in 2001
Domestic revenues* grew by 23%
*FY04 estimate restated (up from USD3.6bn); includes
value of domestic ITES-BPO; forecast growth of 16.7% was
on a base of USD 3.6bn
16.7
20.5
22.025%*
32%
USD Billion
Source: NASSCOM
30.4%
44.4%
23.0%
21.7%
41.7%
16.7%*
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Indian ITES-BPO
0.3 0.6
3.6
5.2
FY04 FY05
ExportsDomestic
Driven by strong fundamentals and broad based growth
Indian IT Software & Services
3.64.2
9.2
12.0
FY04 FY05
ExportsDomestic Software and services* grew by 27%
Indian vendors establishing theirpresence in high-margin segments
MNCs ramping-up offshore deliverycapabilities in India
SME growth about 20-22%
Increasing interest in R&D /engineering services / embeddedsystems
FY05 revenue from productdevelopment & R&D services ~USD3.0bn (up from USD 2.3bn in FY04)
ITES-BPO* grew by nearly 49% Steady growth in traditional services
Increasing traction in high-endprocess outsourcing
Growing domestic segmentSource: NASSCOM
Source: NASSCOM
* Includes domestic and export revenues
USD Billion
USD Billion
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Market indicators remained strong in FY05
While US and UK remain the dominant markets
Indian companies gaining traction in newer geographies; Japan, Germany, Singapore
Geographical mix
Focus on improving revenue mix and increasing realizations, utilization
Mid-sized companies instead emphasizing domain knowledge and process managementskills and demonstrating the value of a focused solutions provider; walking away fromprice-driven deals
BPO firms balancing voice and non-voice business portfolios to diversify revenue and raiseseat utilization
Indian players instrumental in cross border M&A activity in IT services and BPO
Vendor maturity
Stable pricing environment (marginal upward bias)
IT Services: Onsite rates USD 55-65 per hour; offshore rates USD 18-26 per hour
BPO: Wider range; some segments more susceptible to downward pressure
Cost-margin profile supported by declining technology costs, tighter discretionary controls,
increased rollout of variable compensation schemes, a shift to lower-cost campus recruits,sales and marketing leverage through more effective account mgmt, and scale economies
Pricing trends andindustry profitability
Rapid volume growth; clients continued to ramp up engagement sizes with leading vendors
Over 660, USD 1mn+ clients with the top-4 players alone up from 441 in FY04
Steady increase in net client additions across all four quarters
Client wins / increasedpenetration
Expansion of services: infrastructure management, network management, consulting New geographies and vertical markets all leading to a sustained demand backdrop
Growth in addressablemarket
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And the sector scaled record levels of employment
242
360
416
490
588
697
348
254
180
10670
42
FY00 FY01 FY02 FY03 FY04 FY05
IT Software and Services
ITES-BPO
Industry employee base crossed the 1million mark in FY05 IT Software and services employee base has grown at a CAGR of 23.6% (FY00-05)
ITES-BPO employee base has grown at a CAGR of 52.6% (FY00-05)
Indirect employment attributed to IT-ITES 2.5 million in FY05
CAGR 29.8%
Employee numbers 000s
Source: NASSCOM
37.0%
18.5%
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Outlook for FY06 is positive; export growth 30-32%
9.212.0
3.6
5.2
7.3
15.2
FY04 FY05 FY06P
ITES-BPO Exports
IT Software and Services Exports Current penetration of IT budgets ofGlobal 1000 clients is low relative tothe opportunity size
Emerging service opportunities in
BPO, infrastructure management,
testing services, consulting, etc. Indias offshore value proposition
remains the strongest
Superior offshore process
management and service delivery
capabilities
Talent pool: size does matter esp.
when you need to scale-up
12.8
17.2
22.5
USD Billion
Source: NASSCOM
30-32%
25-27%
40-42%
30.4%
44.4%
34%
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Forecast growth for domestic market in FY06 25%
6.0
4.8
3.9
FY04 FY05 FY06P
Domestic Market
Growth forecast for the domestic marketis relatively lower highlighting the
different stages of maturity in the
markets
With progressive deregulation and rising
competition, companies are increasing
their focus on the domestic market;
especially on emerging sectors such as
retail, logistics, telecommunications and
SMEs
Significant untapped potential, rapidadoption and small base likely to result
in high growth (rate) in domestic BPO
USD Billion
Source: NASSCOM
25%
23%
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Indian IT-ITES on track to reach USD 50bn exports byFY09
4.8
2.64.0
6.2 7.7
9.6
12.8
17.2
3.93.02.62.51.9
1.7
FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY09^
DOMESTIC MARKET* EXPORTS*USD Billion
Source: NASSCOM ^NASSCOM McKinsey Study 2002
13-15
50-52
31.2%
37.0%
34.7%
30.7%
18.9%
23.5%
31.3%FY99-05
31.2%FY99-09
31.1%FY05-09
CAGR
10 YR TARGET
ACHIEVED
REQUIRED
* Includes IT Software and Services as well as ITES-BPO
Industry performance tracked continuously andtargets revisited every three years
NASSCOM-McKinsey Study 1999, 2002 & 2005
INDUSTRY TOTALPERIOD
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Key trends likely to shape industry growth in FY06
Offshore penetration of the Fortune 500 increased by 33% in 2004 (from 300 to400)
Recent momentum complemented by low penetration levels (value ~2%) will continue todrive rapid offshore adoption
While a direct face-off between offshore-centric players and global serviceproviders is unlikely (given their differing revenue mix); the degree of competition is
set to increase: Global IT majors will gain noticeable scale in their offshore service delivery capability
to be leveraged while bidding for new contracts
Indian / offshore-centric vendors will steadily gain market share in segments oftraditional IT outsourcing highlighting the adaptability of the offshore model
Greater global delivery model (GDM) adoption; increased interest in newer offshoredestinations though India is expected to remain the leader
Pricing trends in BPO likely to be susceptible to downward pressure, increasing theemphasis on operational excellence to sustain margins
Integration of IT-BPO contracts to become more common
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While other destinations are also emerging...
20044.7
0.5
0.9
1.8
1.9
12.6
17.2
39.6
Others
Mexico
Philippines
Eastern
Europe
China
Canada
India
Total
200810.0
1.1
2.6
6.4
5.0
20.9
48.0
94.0
Others
Mexico
Philippines
Eastern
Europe
China
Canada
India
Total
Total value of outsourcing
to India USD 17.2bn in
2004 estimated at 44% of
the worldwide total Worldwide spend is
forecast to reach USD
94bn by 2008
Value of work outsourced
to India is forecast to reach
USD 48bn by 2008
Source: neoIT
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India still ranks as the preferred destination
Comparative rating for offshore destinationsSource: AT Kearney
5.455.465.585.595.617.12Total
0.922.632.021.770.931.31Sub Total
0.170.390.30.220.10.18Security of Intellectual Property
0.050.430.380.28-0.1Culture adaptability
0.130.40.280.240.150.2Country infrastructure
0.571.411.061.030.680.83Country risk
Business Environment (Scale: 1-3)
0.941.360.920.731.362.09Sub Total
0.110.170.180.11-0.13Employee retention
0.140.250.170.140.070.21Language
0.190.330.330.270.210.25Education
0.08-0.010.020.60.47Size & availability of labour
0.420.610.230.190.481.03BPO experience
People Skills and Availability (Scale: 1-3)
3.591.472.643.093.323.72Sub Total
0.230.340.130.260.090.3Tax and regulatory
0.220.220.270.330.230.23Infrastructure cost
3.140.912.242.533.19Compensation
Financial Structure (Scale: 1-4)
PhilippinesSingapore
Czech
RepublicMalaysiaChinaIndiaFactors
1
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Sustained competitiveness in spite of rising people costs
Source: GECIS
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Five Ss For IT Take-off
Expand Skill sets to create value
Bigger pool to stem attrition/wage inflation
Create academic Alliances through UGC
Skills certification for BPO-entry level
Certification for front line supervisors
SKILLS
Secure Destination for added value
Strengthen IT Act further
4E framework for trusted Sourcing
Improve Data Protection & Privacy Laws
India as a Centre of Process Excellence
SECURITY
Synergize to capture value
Sharing knowledge & learning's
Co-operate and compete to grow
Hardware Software synergies
SYNERGY
Scale New Ground
Bring growth to Tier I & II towns
GATS to ensure people movement
Emphasize off-shoring benefits
SCALABILITY
Score Globally With R&DCollaborate with Academia
Forge Alliances
SCORE
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Idea generation
Create
business
Propositions
Drive and
Shape
Industry
People
SpeedProductivity
Scalable Architecture
Real Time
SystemsIPR
Create Standards
Brand Creation
Productization
Collaborate with
Educational Institutes
to attract people
Invest in R&DEncourage entrepreneurship
Solution mindset
Collaborate
with Academia
Incubation labs
Innovating to Stay Ahead
NASSCOM as
Facilitating Body