dinodia capital advisors_overview of the indian it sector_out with the old, it with the new!, may...

7/27/2019 Dinodia Capital Advisors_Overview of the Indian IT Sector_Out With the Old, IT With the New!, May 2013

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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

Porters 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


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Despite the economic uncertainty around the globe, the Indian IT-BPM (Information TechnologyBusiness 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 theUS$ 100 billion mark

The Indian IT-BPM sector remains a high impact sector and has played an important role in puttingIndia on the global map. It accounts for 8% of Indias GDP and gives employment to 9.5 millionpeople

The first $100 billion revenues were achieved due to Indias arbitrage advantage and the linear modelfor 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 totalexports, followed by Europe which account for 28.50% of the exports. Banking and Financial Serviceis 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 moveup the value chain and provide their clients with quality solutions in addition to the low costadvantage. The companies need to shift from standard lift and shift enterprise services to enterprisesolutions 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 havebecome the three top most priorities of CIOs world over and these services are set to change theface 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 byincreasing their service portfolio beyond the standard enterprise services to SMAC services

EXECUTIVE SUMMARY


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By early 90s, USbased companiesbegan to outsourcework due to lowcost and skilledtalent pool of India

IT Industry starts tomature with increasedinvestment in R&D andinfrastructure

India seen as productdevelopmentdestination

Number of Indianfirms grow in size andstart offering complexservices like productmanagement, go-tomarket strategies etc.

Western firms set upcaptive units in India

Indian firms becomeMulti NationalCompanies withdelivery centers acrossthe globe

Indian firms makeglobal acquisitions

Industry employs 3million people directlyand gives indirectemployment to ~9.5million

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 thelast 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 perNASSCOM (widely acknowledge as the go to Industry body for IT), the industry touched revenues ofUS$ 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 ofthe 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 69.374.2

88.5100.9 108.4

0.0

20.0

40.0

60.0

80.0

100.0

120.0

FY2008 FY2009 FY2010 FY2011 FY2012 FY2013E

USDin

Billions

Indian IT-BPM Industry (FY2008-13E)

CAGR - 11.5%

IT Services52%

BPM19%

Softwareproducts

and ER&D

17%

Hardware12%

Total Industry Size ~ $108 billion

Indian IT-BPM Break-up (FY2013E)


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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 ProcessManagement

(US$ 21 billion)

ER&D & Software

(US$ 18 billion)

Hardware

(US$ 13 billion)


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OVERVIEWIndustry Growth Drivers

Source: NASSCOM

Components Growth Drivers

Project based services IT outsourcing Support & training

Applications and services builtaround social, mobile, cloud &analytics

Customer Care HR F&A Procurement

Platform solutions, bundlingBPM with analytics, mobileengagement of businessprocesses

Application developmentand engineering/design

Software as aservice, technologicaladvances, low cost consumerpreferences

Personal computers Servers Network equipment Storage and security Printers

New users from risinglower/middle class

Indian IT Industry

(US$ 108 billion)

IT Services

(US$ 56 billion)

Business ProcessManagement

(US$ 21 billion)

ER&D & Software

(US$ 18 billion)

Hardware

(US$ 13 billion)


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OVERVIEWIT Exports

Source: NASSCOM and Broker Research Reports in FY 2012-13

US61.50%

UK17.10%

ContinentalEurope11.40%

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)


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

USDi

n

billions

CAGR - 13%

Indian IT-BPM Exports

IT Services58%BPM

23%

Softwareproducts and

ER&D19%

Hardware1%

Category Wise Exports (FY2013E)


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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

USDi

n

billions

CAGR - 8%

Indian IT-BPM ExportsIndian IT-BPM Domestic Industry

IT Services39%

BPM

10%

Softwareproducts and

ER&D

12%

Hardware1%

Category Wise Domestic Industry (FY2013E)

Large

Enterprises47%

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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OVERVIEWPorters 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 orare working on disruptive technologies such as Social, mobile, cloud and analytics, thus providing them with therequired 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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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, theindustry 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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Bargaining Power of Customers Degree

Switching Cost

-Small Clients High

-Large Clients Low

Differentiation of Outputs Low

Presence of Substitutes Medium

Industry Concentration relative tobuyer concentration

High

Customers in the IT sector have a distinct edge relative to other industries given the numerous high quality optionsavailable to them

Large customers have a comparative advantage in relation to small customers in terms of switching cost (no playerwants to lose a sizable contract given their long nature and visibility of revenue)

Increasingly competition is shifting the power towards the buyer making it diff icult for the companies to survivewithout a good strategy and differentiated product / service offering

Bargaining Power of Buyers is MEDIUM

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Threat of Substitutes Degree

Relative Price Performanceof 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 thefield 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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Bargaining Power of Suppliers Degree

Differentiation of Inputs Low

Supplier Concentration relative tothe Industry

High

Substitute Product High

Quality human resources is the largest requirement for the IT sector and low-cost availability of human capital hasbeen the reason that the Indian IT companies have been able to provide quality services to their clients

Indias 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 inrevenues

As competition intensifies for skilled professionals, employee costs could rise rapidly in the next few years (bodyshopping 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, Indias top software companies haveacquired foreign and domestic firms to increase their local

presence in the US and Europe, their main markets, or to acquireemployees with a specific skill set or strengthen their capability in aparticular sector

Most acquisitions by Indian IT companies have not been veryexpensive on a multiples basis and have been targeted atpenetrating new geographies, especially Europe

Another driver of acquisitions by Indian IT firms is the large pile ofcash that many IT companies have been sitting on. At the end of

2012, Tier 1 Indian IT providers such as Wipro, Infosys and TCSwere sitting on billions of dollars each. With that much cash and animproving macroeconomic environment, these firms will continue tospend some of their reserves to buy companies that drive growthas a way of delivering more value to their shareholders

For instance TCSs recently announced the acquisition of Frenchtechnology services company, Alti SA, for $97 million (Rs. 530 Cr.)which is expected to provide TCS with an extra edge in theEuropean market. Through the acquisition TCS has brought in

1,200 employees and reputed clients such as Banque DeFrance( French Central Bank), BNP Paribas, Credit Agricole, andSociete Generale among its clients in banking sector besidesothers 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 thesector 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 30thApril 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/EEBITDA Margin

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SMAC as a Game ChangerOur Next Focus

Services incorporating Social, Mobility, Analytics andCloud (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 shownimmense potential, but are barely understood

While each of these four components have beenevolving individually, companies are beginning totreat them as an integrated whole

The convergence on these technologies means

dismantling the traditional business design: Nolonger is it required to keep people and information inthe same location or to spend big money to supportinformation sharing, communication andcollaboration

These provide an opportunity for the Indian ITplayers to move into a higher margin business ascompared to the typical IT contracts

SMAC can turn out to be a game changer for the$108 billion Indian IT industry and keep India aheadof its competition.

The first $100bn of revenues in the IT Industry tookover a decade, the next might happen in a matter ofa few years if the IT players can understand, adaptand leverage these disruptive technologies quickly

Stay tuned for our next report The Game Changers forthe Indian IT Industrywhich will highlight the impact and

immense potential of these 4 disruptive technologies

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How Dinodia Capital Advisors can help

With our deep understanding of the IT industry and our professional network, we can help you:

Indentify businesses to be acquired or sold

Bring strategic and financial investors into your Technology business (Domestic and International)

Help your business find the most suitable technology partners

Provide advice on any related transaction terms, valuation and pricing


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Dinodia Capital Advisors Private LimitedC-37, Connaught Place , New-Delhi 110001, Website - www.dinodiacapital.comTel No: +91 11 2341 7692, 2341 5272, Fax No: +91 11 4151 3666Email: [email protected]

This report and the information provided herein is the sole Intellectual property of Dinodia Capital Advisors Pvt. Ltd. (DCA) and DCA holds i ts complete

copyrights. No part of this report shall be reproduced / copied / extracted etc. without the express permission of DCA in writing. This document is being suppliedto you solely for your information, and its contents, information or data may not be reproduced. Neither DCA nor its directors, employees or affil iates shall be

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