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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)
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
USDi
n
billions
CAGR - 13%
Indian IT-BPM Exports
IT Services58%BPM
23%
Softwareproducts 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
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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OVERVIEWPorters 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, 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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OVERVIEWPorters 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 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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OVERVIEWPorters Five Forces Analysis
ENTRANTS RIVALS BUYER POWER SUBSTITUTES SUPPLIERS
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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OVERVIEWPorters Five Forces Analysis
ENTRANTS RIVALS BUYER POWER SUBSTITUTES SUPPLIERS
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]
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