note to reader...future outlook forecasted by nasscom. the report also tries to showcase how the...

1

1

1

2

2

Note to Reader

Dear Reader,

Technology disruption brought about by the new age technologies – SMAC, IoT, Artificial Intelligence, etc. had a continued impact

on the global IT-BPM sector even in 2016. In addition to that, the Brexit referendum and the Presidential Elections in the US also

had a great impact on the global markets especially the technology sector. However, instead of all these internal and external

factors, the technology sector which is fueled by digital and new age revolutions continues to grow and drive innovative changes in

the life of millions

This report highlights the current state of the global and Indian IT-BPM industry and even throws light on medium and long term

future outlook forecasted by NASSCOM. The report also tries to showcase how the structural macro-economic changes continue to

impact the industry.

The report then tries to highlight the key emerging digital technologies like BPaaS, RPA, Cyber Security, AI which would continue to

drive growth in the sector and which is expected to become a substantial part of the incremental technology spend by the

enterprises in the coming years

Warm Regards,

Puneet Shivam

Executive Director

Avendus Capital Inc.

3

3

Disclaimer

This report is not an advice/offer/solicitation for an offer to buy and/or sell any securities in any jurisdiction. We are not soliciting any action

based on this material. Recipients of this report should conduct their own investigation and analysis including that of the information provided.

This report is intended to provide general information on a particular subject or subjects and is not an exhaustive treatment of such subject(s).

This report has been prepared on the basis of information obtained from publicly available, accessible resources. Company has not

independently verified all the information given in this report. Accordingly, no representation or warranty, express, implied or statutory, is made

as to accuracy, completeness or fairness of the information and opinion contained in this report. The information given in this report is as of the

date of this report and there can be no assurance that future results or events will be consistent with this information. Any decision or action

taken by the recipient based on this report shall be solely and entirely at the risk of the recipient. The distribution of this report in some

jurisdictions may be restricted and/or prohibited by law, and persons into whose possession this report comes should inform themselves about

such restriction and/or prohibition, and observe any such restrictions and/or prohibition. Company will not treat recipient/user as customer by

virtue of their receiving/using this report. Neither Company nor its affiliates, directors, employees, agents or representatives, shall be responsible

or liable in any manner, directly or indirectly, for the contents or any errors or discrepancies herein or for any decisions or actions taken in

reliance on the report.

4

4

4

Overview of Global IT-BPM Industry And Key Trends

Shaping the Future Outlook

5

5

Global IT-BPM Industry

BPM

USD 186 Bn

7%

Global IT – BPM Market1

USD 2,720 Bn

Packaged Software

USD 386 Bn

IT Services

USD 650 Bn

ER&D

USD 1,498 Bn

14% 55%24%

Service Lines%share in

revenues

Y-o-Y

Growth

Infra Outsourcing 17% -5.0%

System Integration 18% -0.5%

Support & Training 24% -0.2%

IT Consulting 5% 1.1%

CADM 15% 1.2%

Geography%share in

revenues

Y-o-Y

Growth

Americas 44% 3.4%

EMEA 36% -3.0%

APAC 20% 1.5%


revenues

Y-o-Y

Growth

HR 42% 1.9%

Customer Care 37% 3.4%

F&A 19% 3.7%

Procurement 2% 9.1%

Geography%share in

revenues

Y-o-Y

Growth

Americas 60% 4.8%

APAC 23% -2.5%

EMEA 18% 4.3%

Key Verticals%share in

revenues

Automotive 17%

Consumer Electronics 10%

Telecom 7%

Semiconductor 6%

Aerospace 3%

Medical Devices 3%

Geography%share in

revenues

US 40%

Europe 29%

Japan 16%

RoW 14%

1. Excluding Hardware Segment

2. Considered sourcing of global Top 1,000 corporations which accounts for ~45% of global ER&D spend

3. Growth in FY16 over FY15

Delivery Type %shareY-o-Y

Growth

On-premise 85% -2%

Cloud 15% 18%

Geography%share in

revenues

Y-o-Y

Growth

Americas 57% 6.3%

EMEA 28% -9.3%

APAC 15% -2.3%

Global Sourcing

USD 67 Bn

36%

Global Sourcing

USD 99 Bn

Global Sourcing

USD 72 Bn2

5%15%

Source: NASSCOM SR Report

6

6

Global Technology Landscape – Disruption Expected

2017 2018 2020

» >50% of incremental IT

spend for new

technologies (mobile,

cloud, big data, etc.

» 80% of global CIOs will

initiate a framework to turn

information into a

competitive business

differentiator

» IoT spend to grow 1.5x

» ~50% of IT spend will be cloud

based

» 67% of SaaS vendors will

offer data as part of their service

» ~20% of all workers will use

automated assistance

technologies to make decisions

» ~50% of IT budgets will be tied

to digital transformation initiatives

» >30% of current IT vendors will

not exist as we know them today

» 60% of the G2000 will double

their productivity by digitally

transforming processes

» 5x increase in capability of

robots in manufacturing

» Digital

A “digital mesh” is evolving around

the individual

» User Experience (UX)

New and ambient user experiences

emerging to exploit the digital mesh

» Machine Learning

Machine learning technology

combines IoT with smart machine

algorithms to make an algorithmic

business possible

» Cyber Security

Ever increasing security attacks

require security architectures that

emphasize application self-

protection and user and entity

analytics

2014 2020ETraditional Digital

GLOBAL TECHNOLOGY AND BUSINESS SERVICES SPEND

» Digital technologies to account for 80% of incremental IT spending

» New service lines including SMAC, IoT, Cyber Security in the digital

segment expected to attract a ~USD 1,300 Bn of incremental spending a

year

» Innovation as primary source of growth and competitive advantage creating need

for providers with specific domain practice and vertical expertise

» Software products constitute the fastest growing vertical for R&D spend

across the globe with nearly 15% growth in the last two years

» Industry is also moving away from a singular focus on cost, towards a broader

focus on efficiency and innovation, increased agility, faster delivery time

and reduced complexity

USD Bn

15-25% of

traditional

spend saved

by going

digital

80% of new

spend around

digital

technologies

375 to

6202,760

915 to

1,360

3,300 to

3,500+40 -

60%

40%

60%10%

90%

2,140 to 2,385


7

7Digital & Cloud

Investments

Expected To

Drive Growth

Opportunity in Digital –

Half of the ~USD 1,300 Bn digital investment to be funded by reduction in

legacy spend

The decline in legacy expenditures is driven by a range of factors:

» Growing customer preference for digital channels

» Half of computing tasks moving to cloud-based systems will probably

lead to a 15-20% drop in spending for legacy technology

1214

158

1056

279

1208

306

153

153

172

520

184

336

347

119

-21

140

140

196

69

127

134

127

0

127

206

262

265

632

478

1386

2014 TraditionalSpend

2020E Traditionalservice lines

New servicelines

Legacydigital

integration

2020E

x Infrastructure Packaged Software Adm BPO SI Consulting Digital Technologies

Global IT Spend | Digital To Drive Growth & Even Cannibalize

Traditional IT Spend

+42 - 50%

+30%

-15% to -

25%

2,757-450 to -650

2,100 to

2,300

3,440 to

3,550

USD Bn

80% of incremental IT spend to be seen in digital technologies

GLOBAL TECHNOLOGY SPEND BY SERVICES

Source: NASSCOM Perspective 2025, Everest Group

Digital IT Spending Growth –

New service lines in the digital segment expected to attract a ~USD 1,300

Bn of incremental spending a year include:

» Mobile systems: Investment in mobility to grow by 15%-18% p.a.

» Cloud-based systems: Penetration of applications using SaaS

models will likely grow from ~13% in 2014 to ~35% in 2020

» Big data analytics: Growth to come from mining a vast field of

currently untapped public data to reach four times its current size by

2020

» Automation: Cost savings, shortened process cycles & improved

customer experiences in the banking industry

INFRASTRUCTURE

PACKAGED SOFTWARE

TRADITIONAL AM

15 – 20% Reduction



8

8

8

Overview of Indian IT-BPM Industry And Key Trends

Shaping the Future Outlook

9

9

India IT-BPM Industry

BPM

USD 28 Bn

7%

India IT – BPM Market1

USD 131.5 Bn

Packaged Software

USD 6.5 Bn

IT Services

USD 71 Bn

ER&D

USD 22 Bn

14% 55%24%


revenues

Y-o-Y

Growth

CAD 35% 9.7%

IS Outsourcing 20% 12.2%

Appl. Management 12% 10.1%

Software Testing 8% 11.7%

Others 26% 9.1%

Geography %share in revenues

USA 62%

UK 17%

Europe 12%

RoW 9%


revenues

Y-o-Y

Growth

CIS 40% 7.5%

F&A 22% 8.8%

Knowledge Services 21% 12.6%

Others 17% 7.3

Geography%share in

revenues

Y-o-Y

Growth

USA 62% 9.3%

UK 17% 8.7%

Europe 12% 7.6%

RoW 10% 8.0%

Key Verticals %share

Telecom 23%

Semiconductors 18%

Automotive 16%

Consumer Electronics 6%

Aerospace 6%

Others 31%

Geography %share

US 55%

Europe 28%

Japan 10%

RoW 7%

1. Excluding Hardware Segment

2. Growth in FY16 over FY15

Provider Type %share

Large Pioneers 30%

MNCs 40%

Growth Firms 25%

Start-ups 5%

Geography%share in

exports

USA 65%

UK 16%

Europe 10%

RoW 9%

Exports

USD 24 Bn

86%

Exports

USD 61 Bn

Exports

USD 20 Bn

90%81%

Exports

USD 2.1 Bn

32%

High Growth YoY basis

Service Lines %share

ER&D 65%

Embedded System 26%

OSPD 9%

Verticals %share in revenues

BFSI 54%

Hi-tech/Telecom 16%

Manufacturing 6%

Healthcare 4%

Others 20%

Verticals %share in revenues

BFSI 54%

Hi-tech/Telecom 16%

Manufacturing 6%

Healthcare 4%

Others 20%

Verticals %share

Enterprise Software 26%

Fin-tech 15%

Security 7%

SaaS 6%

Analytics 5%

Others 41%


10

10

Indian IT-BPM Industry Trends

75

115

190

2016 2020 2025

Indian IT Market

USD Bn

28

41

54

2016 2020 2025

Indian BPM Market

USD Bn

22 40

90

2016 2020 2025

Indian ER&D Market

USD Bn

UPCOMING TREND HIGHLIGHTS UPCOMING TREND HIGHLIGHTSUPCOMING TREND HIGHLIGHTS

» Firms are building automation platforms and

segregated digital units

» Partnerships are built with start-up ecosystem

» Enterprise mobility – Managed mobility services

to grow at 30.5% CAGR in 2014 – 2019 period

» SaaS adoption rates to reach 35% by 2020

from present 15%

» Pricing shift to hybrid and outcome based

» Increased emphasis on value addition and

innovation, gaining customer experience, and

building digital talent pool

» ~40% of revenue growth by 2020 expected to

come from new industries turning to offshoring

and new geographies, particularly Asia-Pacific

and Europe

» Next gen models such as BPaaS, cloud analytics,

and robotics will have an all pervasive effect on

industry

» Growth in platform based and verticalized services

» Text, mobile analytics to unlock significant value

» Hiring local talent to become a strategic

imperative

» Increased preference for standardized, cloud

based platforms for non-core processes

» RPA & autonomics expected to grow and help

integrate legacy business processes in the

handling of repetitive and rule-based tasks through

machine learning

» Shifted focus from cost and productivity to

customer experience and building client brands

» Automotive & Hi-tech – key verticals expected to

drive growth

» SMART products/solutions – robotics, 3D

printing, IoT, Industry 4.0, Analytics – key growth

drivers

» IoT – critical area of investment

» After market solutions, obsolescence

management – emerging opportunities

» Greater focus on IP and end-to-end solutions

» Increasing software content driving growth in

embedded systems

» Govt. initiatives – smart factories, cities, buildings

– all leveraging IoT/connected devices

technology, to become another key driver

Digital technologies continue to define the sector and is likely to have a 23% revenue share by 2020 and >38% by 2025

Indian service providers face a significant opportunity as digital technologies continue to be embedded in an ever widening range of products and services


11

11

KEY TRENDS CLEARLY EMERGING IN THE SOFTWARE MARKET

Source: JPM Report, Company Press Release

Indian Software Products | Experiencing Rapid Evolution And Adoption

SaaS Gaining Prominence

» Enterprise SaaS expected to grow 4.5x by 2020

» ~ 8 million SMBs market in India presents a huge opportunity for SaaS vendors. SMBs are

increasingly adopting SaaS based applications as it reduces time and costs, and offers

easy access and compatibility

Growing Trend for Verticalization

» Demand for verticalized software continues to grow as more complex business models

demand solutions for specific needs

» India to become a rapidly growing Fin-Tech Hub with BFS generating the highest revenue

for the Indian products segment. Over 200 unique Indian firms offer Fin-Tech solutions out

of which 30 are mature firms with global demand

Niche focused Analytics is Trending

» 400+ analytics focused Indian firms have developed and deployed products catering to

niche business needs or with enterprise BI and marketing analytics functionalities

» Analytics solutions are getting more verticalized with limited applicability across sectors

» ~ 30% of the vertical focused firms have acquired large clients globally, showcasing

growing demand for specific solutions

» Example: Customer XPS – Risk Management; Ugam – Retail Analytics

Emergence of New Segments

» More and more products are being developed for emerging verticals like healthcare,

education, travel, and retail

» These emerging verticals exhibit an upsurge in demand for solutions around mobile, cloud,

SaaS, and digital technologies.

4.2 4.3

1.9 2.1

FY15 FY16

Indian Software Market

6.16.5

226 302

2014 2015

SaaS Market in India

USD Bn

USD Mn

7%

9%

6%

12%

32%

34%

Others

Insurance

Lending

Trading

Banking

Paymentprocessing

Fin-Tech Firms - Key Segments

65% of firms are targeting payment processing and banking

12

12

12

Near Term Performance Impacted by Market Cycles –

However Long Term Story Remains Intact

13

13

Structural and Market Trends Impacting Near Term Performance (1/2)

ACCENTURE QUARTERLY GROWTH

Even US IT vendors’ facing growth headwinds and most incremental growth is attributed to digital revenues

Syntel facing de-growth phase due to maintaining status quo and not adapting to changing IT environment

7,8888,013 7,946

8,435 8,489 8,516

2%

2% -1%

6%

1%

0%

-2%

3%

8%

7500

8000

8500

9000

Aug, 15 Nov, 15 Feb, 16 May, 16 Aug, 16 Nov, 16

Revenue QoQ Growth

3,085

3,1873,233 3,202

3,3703,453

6%

3%1%

-1%

5%

2%

-2%

0%

2%

4%

6%

8%

2800

3000

3200

3400

3600

Jun, 15 Sep, 15 Dec, 15 Mar, 16 Jun, 16 Sep, 16

Revenue QoQ Growth

240

254 255

241

246

241

9%

6%

0%-5%

2%

-2%

-10%

0%

10%

20%

230

240

250

260

Jun, 15 Sep, 15 Dec, 15 Mar, 16 Jun, 16 Sep, 16

Revenue QoQ Growth

SYNTEL QUARTERLY GROWTH

USD Mn

USD Mn

USD Mn

» Much of FY16 growth was driven by solid ~30% growth in the company’s digital

and cloud business

» However, the core business/applications was flattish and slightly

underperformed

» The company not seeing any impact from Brexit

» FY17 growth guidance of 5% - 8% vs 10.5% in FY16

» Will continue to benefit from solid adoption of digital and cloud trends

» CY16 revenue growth guidance was lowered from 10-13% to 8.5-9%

» Growth in outsourcing segment was attributed to continued ramp up in

BPaaS contracts

» Consulting business was impacted by weakness in discretionary spend

» BFS and payor verticals shows continued weakness

» High single digit organic revenue growth guidance for next few years

COGNIZANT QUARTERLY GROWTH

» The company expects its revenue to de-grow by 1% this year

» Even its digital revenues declined in Q3 on Q-o-Q basis which was

attributed to weak discretionary spending in the financial services vertical

» Low growth could be attributed to:

‒ Higher concentration in few verticals

‒ Higher mix of maintenance/legacy areas

‒ Under-investments in front end digital and consulting areas

» Its top client, American Express, was down 5% in Q3 on Q-o-Q basis

15.2% 16.7%

19.7%20.4%

28.,5%30.5%

EBITDA

Margins

14

14

TCS QUARTERLY GROWTH

Major Indian IT services firms have been facing challenges with growth and have revised down their growth forecasts for the future

Even NASSCOM revised their industry growth forecasts for FY17 on the down side

4,143 4,1454,207

4,362 4,374 4,387

3%

0% 1%

4%

0%0%

0%

1%

2%

3%

4%

4000

4100

4200

4300

4400

4500

Sep, 15 Dec, 15 Mar, 16 Jun, 16 Sep, 16 Dec, 16

Revenue QoQ Growth

2,392 2,4072,446

2,501

2,5872,551

6%

1%2%

2%3%

-1%

-2%

0%

2%

4%

6%

8%

2250

2300

2350

2400

2450

2500

2550

2600

2650


Revenue QoQ Growth

1,832 1,838

1,882

1,9311,916

1,903

2%

0%

2%

3%

-1% -1%

-1%

0%

1%

2%

3%

1750

1800

1850

1900

1950


Revenue QoQ Growth

WIPRO QUARTERLY GROWTH

USD Mn

USD Mn

USD Mn

» The growth for TCS has been slowing down over the past 2 quarters

compared to the same quarter a year ago

» The lower growth has been attributed to drop in revenues from BFSI

» Growth is largely led by life sciences, healthcare and energy verticals

» JPM forecasts constant currency revenue growth of 10% w/o Brexit impact

» Infosys management had indicated that it expects its revenues to rise 11.5

to 13.5 % in constant currency terms in FY17

» The revenue guidance was revised downwards for the 3rd time in the year

after each quarterly results by the management, the recent revision

suggests 8.4% - 8.8% growth in constant currency

» Consulting and Finacle business are the key drivers of growth

» The AI platform Mana is helping improve efficiency and win new accounts

INFOSYS QUARTERLY GROWTH

» Experiencing lower growth than larger peers

» Customers have reduced their spend on technology. The discretionary

spend in Energy and Utilities segment has not picked up

» India and the Middle East business has underperformed

» Digital is the key driver for growth

28.8% 27.7%

28.3%27.9%

20.4%21.8%

EBITDA

Margins

Structural and Market Trends Impacting Near Term Performance (2/2)

15

15

CLASSIC PYRAMID STRUCTURE IS LESS EFFECTIVE LEVER TODAY

Source: JPM Report, Company Press Release

Current Performance | Taking Stock (1/2)

» The magnitude of benefits of the classic pyramid structure is a function of revenue growth itself

» A company that grows the top-line at 15%+ can benefit more from the pyramid than a company that’s growing much slower (say <10%) as a faster-growing

company can “juniorize” a larger part of the workforce (including the incremental workforce) than its slower growing peer

» As the industry faces slower growth (<10%) off a larger base, the pyramid would not be as much of an effective lever today as it has been

DECREASING IMPORTANCE OF T&M ENGAGEMENTS

» Traditional T&M contracting is quickly withering away as input-based pricing gives way to fixed-price/managed services contracts (now moving to unit-

based, output-based, outcome-based contracts)

» For instance, Wipro & HCL Technologies derive 80%+ of their incremental revenues in the past three years (over FY12-16) from non T&M engagements

» Even digital assignments, which at present are more T&M nature being relatively small and new, would likely graduate to fixed price/managed services

model once they go mainstream and vendors develop internal tools and IP around digital

ONLY LOWER LEVEL OFFSHORE CENTRIC TASKS ARE BEING AUTOMATED AT PRESENT

» Tools & accelerators developed using automation are rendering significant parts of the mainstream coding process much less important today

» It can obviate the need of manpower by as much as one-third at the lower-end of bread-and-butter services

» This is reducing the intensity of intake of entry-level talent without enabling a corresponding narrowing at the mid to higher levels to preserve the

span/control ratios (classic pyramid structure). Hence, many organization structures are taking form of bulging bottle from traditional classic pyramid

QUALITY OF AUTOMATION MATTERS MORE THAN QUANTUM OF AUTOMATION

» Ideally, the focus should be more on costs being released through automation as opposed to just the headcount released

» Even if software professionals are released in large numbers from automation, it serves little purpose in managing costs if most of these professionals

released are the lower-cost offshore professionals (or just the lower-end offshore jobs are automated)

» Getting the pyramid right of employees released through automation is more important (e.g. releasing experienced and/or onshore employees to a

commensurate degree from automation for cost benefits)

16

16

AUTOMATION CAN BECOME NEXT SAVIOUR FOR MARGINS AFTER THE FADE-OUT OF THE PYRAMID

Source: JPM Report, Company Press Release, Fact Sheets, Bloomberg

» Firms can bring in automation, IP-based solutioning and software led productivity to the requisite degree across levels (not predominantly confined to

the junior levels) to offset margin loss from the lack of pyramid

» And more importantly, they should be able to retain a reasonable portion of the automation/productivity gains without surrendering much of that to the clients

HIGHER CONTENT OF FIXED PRICE REVENUES DOES NOT GUARANTEE BETTER MARGINS OR HIGHER GROWTH PER SE

» Fixed price bids may well bring in lower margins than T&M, especially if firms have been overly aggressive in their fixed bids or overestimated the

automation benefits

» For example, Wipro has turned in nearly 100% of its incremental revenues over a four-year period (FY12-16) from the non-T&M side, yet Wipro’s EBIT

margins have barely moved in four years (FY12-16), suggesting that clients may be benefiting largely from Wipro’s fixed price aggression than Wipro. Also,

Wipro has fallen short on the aspect of revenue growth

» Thus, by itself higher fixed bid, operational discipline & productivity are necessary but not sufficient. It must be married with consistent market-share gains

revenue growth and the vendors’ ability to retain a reasonable portion of gains

Company

Contribution of Fixed

Price RevenuesProportion of incremental

revenues from fixed price

projects over FY12-16

Revenue

CAGR

(FY12 – FY16)

EBITDA MarginsRevenue/FTE

(in 000’s)Gross Margins (%)

FY12 FY16 FY12 FY16 FY12 FY16 FY12 FY16

Infosys 39.3% 44.3% 58.3% 8% 31.6% 27.3% 49.1 50.3 41.3% 37.4%

TCS 47.4% NA* NA* 13% 29.6% 28.2% 46.2 48.7 45.9% 44.0%

Wipro 45.7% 55.2% 94.6% 0% 19.0% 21.1% 44.6 43.6 29.2% 30.4%

HCL 45.5% 56.5% 76.8% 11% 17.9% 21.5% 50.3 59.4 33.1% 34.2%

Cognizant1 31.6% 36.7% 42.0% 19% 20.7% 20% 49.2 56.6 42.2% 40.1%

*TCS has stopped disclosing Fixed price metrics effective 1QFY15

1. For Cognizant – CY11 & CY15 considered

Current Performance | Taking Stock (2/2)

17

17

STRINGENT US VISA REGULATIONS COULD HURT INDIAN IT FIRMS

Source: JPM Report, Avendus Views, OFLC, US Department of Labor

» Stringent wage requirements would likely apply to employers with more than

50% of US headcount on visas, which could force Indian IT firms to reduce

their visa dependency in the US

» More likely impact from the bill to be on margins, and not on client servicing

POTENTIAL IMPACT #1 – HIGHER WAGES FOR H1B/L-1 WORKERS

» Per current regulations, an H1B worker must be paid at least “prevailing

wages” for the specific occupation, experience level, and state

» The risk from new regulation is that it could raise the bar for prevailing wages,

or set a minimum level for such wages.

Visa Issues | Could Hurt Offshore IT Firms in Near Term

POTENTIAL IMPACT #2 – DIFFICULT TO PROCURE H1B VISAS

» Potential bill could make it difficult for firms to procure visa and deploy visa holders

» For example, some of the recent bills included features such as:

Preference to US graduates, STEM graduates for the H1B visa race

Increased processing time and stringent review of applications

» Potential regulation would likely require firms to reduce number of visa holders to

below 50%

It Outsourcing Firms Have a Big Share in H1B Visa Applications –

However its in a Reducing Trend

39.4 45.252.6

63.2 63.9 66.2

2009 2010 2011 2012 2013 2014

% Share Of Indian Citizens In Approved H1B Petitions Has Been Increasing

Dominance of Bachelor’s Degree Holders among H1B

Visa Workers

1 1 1.3 0.7 0.4

40.7 44.6 43.7 49.5 47.3

38 34.8 38.838.2 39.4

14.5 13.6 4.68.3 9.5

5.8 6 11.6 3.3 3.4

2009 2010 2011 2012 2013

Less Than Bachelor'sDegree

Bachelor's Degree

Master's Degree

Doctorate Degree

Professional Degree

2,59,346 3,08,535 1,88,837 2,54,400

8,47,959 9,44,842 9,33,931

12,19,615

2012 2013 2014 2015

Others IT Companies

(31%) (33%) (20%) (21%)

%share in of IT companies in total application

18

18

18

New Age Digital Trends – Key Growth Drivers for 2020

Expectations across segments

19

19

DIGITAL – UNDERSTANDING ITS ACTUAL ESSENCE

» Digital Revenues for Indian players

Firms are stretching the definition of their digital business

Transformative work is still a tiny component of the digital business for most

IT companies

For most Indian IT services firms, revenue per employee in the digital space

is almost the same as that in their traditional lines.

» Accenture - Most mature global IT player in next gen offerings

Accenture generates USD 13.5 Bn or 40% of its revenues from the next gen

offerings which is growing at 30% Y-o-Y

Unlike India listed IT companies, quality of digital revenues is clearly

distinguishable

» Key trends in Digital Transformation

AI, cloud, automation, mobility, single sign-on, IoT, analytics, digital

commerce are all components of digital

IT companies need to enable business organizations to become more opex

centric

Access to data would be the key differentiator in the future

1. On LTM basis

2. Source: Mint Research, JPM Report

3. Approximate numbers, Avendus Estimates

Digital Revenues of IT Services Companies

FOCUS ON DIGITAL REVENUES IS INCREASING

CompanyDigital Revenues as a %

of Total Revenues3

Infosys 8%

TCS 16%

Wipro 12%

HCL 5%

Tech Mahindra 10%

Accenture 40%

Cognizant 30%

Infosys TCS Wipro

Revenue per employee1 (USD) 49,856 46,102 46,278

Digital revenue per employee2 (USD) 55,173 48,780 55,862

DIGITAL OFFERINGS OF GLOBAL LEADERS

COGNIZANT

Social

ComputingMobility

Advanced

AnalyticsCloud IoT

Robotics SecurityDigital

Marketing

Digital

Architecture

Transformativ

e Consulting

ACCENTURE

Interactive – End to end digital marketing solutions

Platforms Cloud Analytics Mobility Security

Accenture

Revenue per employee1 (USD) 90,681

Digital revenue per employee2 (USD) 218,750

20

20

TECHNOLOGY ENABLING A GREATER PLAY OF NON VOICE

CHANNELS

BPM- Automation is a Key Disruptor

» BPM industry has been one of the early adopters of technological

advancements by introducing Interactive Voice Response(IVR), which

enables computers to interact with humans

» New technology levers such as RPA are leading to shift from voice to

multi channel integrated services with new business imperatives such

as process optimisation and automation

» Around 15% - 20% of the BPM business is now getting automated with

various new age technologies including RPA

AUTOMATION TO IMPROVE PRODUCITIVITY

» RPA uses software to automate repetitive processes that humans

would otherwise do, freeing these people for higher value work

» Apple Siri, Microsoft Cortana, IBM Watson and Google DeepMind are

all examples of software robots which are now mainstream

» Bank processes, invoice processing, order processing and claims

management – are prime candidates for RPA application, as they are

rules-driven, data-intensive and repetitive in nature, and they cross

multiple systems

» It is estimated that AI will deliver over USD 70 Bn in net productivity-led

gains for IT-BPM service providers by 2020. 80% of the USD 70 Bn

productivity gains will come from infrastructure services and business

process management services.

SOME COMPANIES TO WATCH OUT

» Leading AI company which helps businesses automate their

IT processes through intelligent automation

» Provides enterprise wide decision management solutions

Impact of AI on

Traditional ITPotential AI Plays

EBITDA

Impact

Infrastructure

Services (IS)

» Automation of incident

management, health checks,

deployment & compliance8% - 10%

BPM » Elimination or streamlining of

large clunky processes such as

contract, claim handling, order to

cash

6% - 8%

ADM &

Testing

» Automated diagnosis,

classification, scoping,

remediating & revalidating of QA

issues

» Faster legacy migration

2% - 5%

Consulting &

Engineering

Services

» Intelligent & intuitive UI in ESO,

such as self configuring menus

» AI enabled conceptual &

analytical processes

3% - 5%

1. Net of expected price erosion due to

client pricing pressure JPM Report, NASSCOM, Avendus Estimates

70 B+

Net Productivity

Gains1

5–7%

EBITDA Impact

21

21

Source: Everest Research, NASSCOM

BPaaS | Replacing Legacy Solutions, Expected to be a ‘Game Changer’ for

the Next Decade

» Business-Process-as-a-Service (BPaaS) is a model in which BPO services are provided through cloud

» Current trend in the BPaaS market is the increasing acceptance of technologies such as cloud computing, business analytics, social media platforms, and process

automation software

» The main driver of BPaaS market is growing need to improve business process agility at minimum cost

» BPaaS is disrupting providers’ service models by cannibalizing their traditional revenue stream and forcing them to invest in BPaaS to stay relevant in the era of SMAC

» As providers develop BPaaS utilities, they need to either partner with vendors or build their own platforms. This requires them to embrace a product-service mindset

» Among the 4 major horizontal BPM service lines BPaaS adoption currently is highest in human resource outsourcing (HRO), rising fast in procurement outsourcing

BPaaS Revenues: expected to grow 4X faster than traditional BPM

services from 2014 to 2020

0.3

1.0

5.0

FY2015 FY2020E FY2025E

25-27%

2-3%

9-10%

US

D B

n

1-2%

35-38%

Percentage share in BPM revenues

CAGR over 5 years

Type of Buyer Impact

Small

(~USD 1 billion revenue/ 5000

employees)

• 35 – 40 percent cost savings

• Leverages provider’s economies of scale

• Access to cost-prohibitive technology

Medium

(~USD 5 billion revenue/ 20,000

employees)

• 25 – 30 percent cost savings

• Economies of scale benefit

Large

(~USD 20 billion revenue/ 100,000

employees)

• 10 percent cost savings

• Technology enhancements

• Explore new IT/BPM infrastructure relations

• Expiration of legacy technology licenses

Substantial impact for small and medium firms

Selective Developments

AcquiresBPaaS provider

Partnership

Partnered to deliver BPaaS solution in the automotive,

public sector and financial services industries

BPaaS Implementation: Cases

Genpact SaaS solution – ‘Electronic Invoice Presentation & Payment

Platform’ in the leasing division of a major office supplier resulting in 20%

reduction in invoices and other related operational costs

TCS BaNCS platform; centralized core banking solutions enables banks to

process higher volumes at lower costs, end-to-end transaction processing,

interfacing with external infrastructure/third party software, generating

customized growth

22

22

Source: Markets & Markets, Cyber Security Ventures, Technavio

Cyber Security: Growth in Cyber Crimes in Today’s Digital

Economy to Drive the USD 120+ Bn Cyber Security Market

GLOBAL CYBER SECURITY MARKET

USD Bn

122 135

150 166

183

202

2016 2016 2018 2019 2020 2021

» Global cyber security market is estimated to grow at a CAGR of 10.6% from USD 122 Bn

in 2016 to USD 202 Bn in 2021

» Global annual cyber crime costs are predicted to grow from USD 3 Tn in 2015 to USD 6

Tn in 2021

» Cyber security budgets seeing an upward swing:

» J.P. Morgan ard Chase & Co. doubled its annual cybersecurity budget from

USD 250 Mn in 2016 to USD 500 Mn in 2017

» Bank of America’s cyber security budget for 2017 – USD 400 Mn; For Citi –

USD 300 Mn; For Wells Fargo – USD 250 Mn

» The U.S. government has increased its annual cybersecurity budget by 35%,

going from USD 14 Bn budgeted in 2016 to USD 19 Bn in 2017

» Global industrial cyber security market is estimated to grow at a CAGR of 14.17% over

the period 2014-2019

» Securing operations’ systems in sectors such as utility (energy, nuclear, power,

oil & gas, water) and manufacturing plants

» For eg. In Dec 2015, Russian hackers launched a cyber attack on Ukraine’s

power grid completely blacking out 103 cities and partially blacking out 186

cities for a few hours

Application security to grow at the highest CAGR

from 2016-2021Horizontal

North America to dominate the cyber security

export market in 2016, second in line being IsraelGeography

Top

acquirers in

Cyber

Security

28

15

13

12

12

10

8

7

Cisco

Symantec

Microsoft

IBM

EMC

McAfee

Trustwave

Google

23

23

Source: Accenture, Gartner, Nasscom, Company Websites

Intelligent Automation: The Essential New Co-Worker For The Digital

Age

Creating intelligent systems that learn, adapt and potentially act autonomously rather than simply execute predefined instructions is the primary battleground for

the future

Trends in

Intelligent

Automation

AUTOMATION INITIATIVES OF LARGE IT SERVICES COMPANIES

Automation Platform Offerings

TCS • Ignio• An artificial intelligence based automation platform which automates and optimizes IT processes within

an organization

Infosys • Mana

• Information Platform – an open source data analytics platform that enables businesses to operationalize

their data assets

• Automation Platform – a platform that continuously learns routing logic, resolution processes and

diagnosis logic to build a knowledge base that grows and adapts to changes in the underlying systems

• Knowledge Platform - a platform to capture, formalize and process knowledge and its representation in a

powerful ontology based structure that allows for the reuse of knowledge as underlying systems change

Wipro • Holmes• An artificial intelligence platform built on open source computing aimed at optimizing resource utilization

and reducing costs

HCL • DryICE • A digital service exchange platform enabled by ServiceNOW

Tech Mahindra• CareXa

• UNO

• Customer care with agent virtualization, analytics, assisted interactions and digital channels

• RPA tool that manages operations improving average handling time and customer experience

Mindtree • Mobile Automation Framework • Automation framework that automates applications on any mobile platform

Cognizant• ADPART

• Healthcare Process Automation• Algorithm which automates the design of test cases

Select

Acquisition

in

Automation

USD 200 Mn CEO

Speaks

“The repetitive tasks can be automated by bringing Artificial Intelligence (AI) to our

existing services and existing customer landscapes, so that we fundamentally

transform cost and productivity”

- Vishal Sikka, CEO, Infosys

NLP

Automation Intelligence

Expert System

Machine Learning

System

24

24

24

APPENDIX

25

25

25

Key Verticals & Service Lines

26

26

Verticals - Healthcare and Retail | Emerging Areas of Growth

Retail Vertical

Retailers typically have fragmented IT applications and infrastructure due to complex

operations, heavy reliance on custom developed applications, and M&A activity

– This results in poorly structured data, driving up the cost of maintenance,

upgrade, break/fix, data centers, and personnel, while constraining the flexibility

and responsiveness of IT

Retail IT spending in North America grew by 5.7% in 2015 with USD 5 Bn in new

spending

Key trends driving growth are:

– Investments by retailers in omni-channel integration, data security and mobile

proliferation and engagement

– Spending around payment systems in North America (encryption, tokenization

and EMV) alone should surpass USD 4.5 billion for the year as retailers rush to

meet the deadlines in place for EMV introduction to the U.S. market

Source: Nasscom Strategic Reviews; IDC Estimates; Research & Markets - Healthcare IT Outsourcing Market

by Application & Industry - Global Forecast To 2018; Bain Consulting; Emdeon 2010 Annual Report; IHL

Report; Healthcatalyst; Avendus Estimates

Healthcare Vertical

North America is the largest at ~54% of the global market; expected to reach USD 104

bn by 2020 from USD 66 bn in 2015, at a 13% CAGR

Technological advancements are transforming the healthcare industry:

‒ IoT: 70 million people in the US are using wearable devices to monitor their

physical activity, sleep patterns, and calorie consumption. This data can potentially

be used to improve patient care and drive growth in a new segment of IT services

‒ Switch to ICD-10: Providers and hospitals continue to work towards meaningful

use of EHRs and are in the process of switching from ICD-9 to ICD-10

Regulatory environment provides opportunity for growth in IT spending:

– Obamacare: ~30mn more people insured Greater outsourcing of front-office

(eligibility checks) and back-office (claims and ARM)

– HITECH Act: All providers must store health records electronically by 2015

Increased middle-office outsourcing for EHR and EMR

– Health Insurance Portability and Accountability Act (HIPAA): Providers and payers

will need to step up data security to avoid violations and penalties

122

229

2015 2020E

Global Healthcare IT Market

US

D b

n

• RCM -> Revenue Cycle Management

• ARM -> Accounts Receivable Management

13%

181

190

2014 2015

Global Retail IT Market

5%

55

104

2015 2020E

North American Healthcare IT

Market

US

D b

n

13%

US

D b

n

17.3

18.4

2014 2015

Global Consumer Spending

5%

US

D tn

27

27

Key Service Lines

Source: Nasscom Strategic Reviews & Indian Knowledge Services Outsourcing Industry – Creating Global Business Impact;

Technavio – Global Data Analytics Outsourcing Market 2012-2016; JP Morgan

Analytics

Key Growth Drivers

– Exponential increase in data generated from ERP, CRM, SCM systems

– Convergence of computing technologies along with proliferation of social

media and smart phones / tablets

– Growing need for companies to create differentiation leveraging customer

insights and predictive analytics

– Acceptance of outsourcing of core business activities like clinical trials, market

segmentation which involve complex judgement based processing

Upcoming Trends

– Transforming from a discretionary spend category to an integral tool for

competitive differentiation

– Bulk of the growth to centre on gathering, visualizing, and analysing data

generated through various business processes thus becoming an integral

component of most BPM services

Busin

ess Im

pact

Solution Sophistication

Reporting

Descriptive

Analytics

Predictive

Analytics

Prescriptive

Analytics

Dashboard and workflow

tools to increase visibility in

the supply chain

Tools used for issue

resolutions, cost

optimization and

scheduling

Solutions to

forecast demand,

supply, and

potential disruptions

Cognitive systems to mitigate

future risk and enhance asset

utilization

8501200

3100

2014 2015 2020

Analytics Market In India (USD Million)

Engineering R&D Services (ER&D)

1011

1618

20

FY12 FY13 FY14 FY15 FY16E

India ER&D Exports

US

D b

n

19%

Embedded solutions account for around half of the market driven by open standards /

standardisation

Increased presence of electronics and communications technology in end-user industries such as

auto, aero and hi-tech is driving R&D spend

Greater thrust on fuel efficiency / alternate fuels and convergence of technologies to drive future

ER&D spend

Asia is the fastest growing market China saw a 31.6% increase in R&D spend

India’s ER&D export market USD 20 bn in FY2016 from USD 10 bn in FY2012. Constitutes

~24% of total IT-BPM exports and has grown >2.0x in the last five years

– Slated to grow to ~USD 40 bn by FY20 due to increasing maturity of offshore service

providers, Indian localization demand and quality manpower

28

28

28

About Avendus

29

29

Avendus Overview

*JV with IL&FS Financial Services; Total team strength 120+ professionals; 1 USD = 60 INR

» Have closed 72 M&A transactions since 2007, 48 of which were cross-border

» Market leaders in the IT & BPO segment, both in terms of total deal value as

well as number of deals(1) since 2009

M&A Advisory

» Add on product to the core Investment Banking business

» Provide acquisition finance advisory, mezzanine fund raise, Tier II capital etc.

» Closed 14 deals since 2011

Structured Finance

Equity Capital

Markets

» Started the business in 2008

» Raised nearly ~USD 830 Mn for clients in over 13 IPO/QIPs/OFS since 2008

» Relations with investors in Hong Kong, Singapore, Europe and the US

» Closed 68 PE transactions since 2007

» More than USD 2 Bn raised through PE Syndication since 2007

Private Equity

Syndication

Institutional Equities*

Equity Research

Sales & Trading

» Large cap stocks covered across 10+ sectors

» >40% of BSE 500 covered

» Empanelled with 90+ domestic and international clients

Private Equity

Investing

» Recently launched new fund of USD 500 Mn in partnership with Zodius Capital

» Fund I fully liquidated and returned to investors with IRR of 13% (1.3x)

» 2 exits with 3x returns in < 18 months

Wealth Management

for UHNI clients

» Started in 2010, AUM has grown to USD 400 Mn+ with over 150+ families

» One of the few WM players to have broken into the US market for NRI clients

Avendus Offices

MumbaiBangalore

New

York

London

New Delhi

A Global Financial Services Firm

Investment

Banking

Public

Equities

Alternate

Asset

Management

Wealth

Management

30

30

www.avendus.com

Contact Details

Puneet Shivam

Head – US & Co-head Outsourcing Group

Email: [email protected]

Mobile: +1 917 554 7030

Landline: +1 646 707 0789

mailto:[email protected]

31

Pri

vate

& C

on

fide

ntial

AVENDUS CAPITAL PVT. LTD.

MUMBAI (Registered Office)The IL&FS Financial Centre

B Quadrant, 5th Floor

Bandra-Kurla Complex

Bandra (East), Mumbai 400051

Tel: +91 22 66480050/0950

Fax: +91 22 66480040/0940

UNITED KINGDOMAvendus Capital (UK) Private Limited

33, St James’s Square,

London SW1Y 4JS

Tel: +44 203 159 4353

Fax: +44 207 661 9400

Avendus Capital (UK) Private Limited is authorized and regulated by

the FSA

UNITED STATES OF AMERICAAvendus Capital Inc.

499 Park Avenue, 12th Floor

New York, NY 10022

Tel: +1 646 707 0789

Fax: +1 646 707 0899

www.avendus.comCIN: U99999MH1999PTC123358

Our Locations

note to reader...future outlook forecasted by nasscom. the report also tries to showcase how the...

Documents