it sectoral analysis.pdf

7/27/2019 IT Sectoral Analysis.pdf

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Information Technology

The information technology (IT) and information technology enabled services (ITeS) industry has been one of thekey driving forces fuelling India's economic growth. Information Technology (IT) is defined as the design,development, implementation and management of computer-based information systems, particularly softwareapplications and computer hardware. Today, it has grown to cover most aspects of computing and technology.The ITES industry provides services that are delivered over telecom or data network to a range of externalbusiness areas. Examples of such business process outsourcing (BPO) include customer service, web-contentdevelopment, back office management and network consultancy etc.

The Indian IT and ITES industry has continued to perform its role as the most consistent growth driver for theeconomy. Service, software exports and BPO remain the mainstay of the sector. Over the last five years, the ITand ITES industry has grown at a remarkable pace. A majority of the Fortune 500 and Global 2000 corporationsare sourcing IT and ITES from India and it is the premier destination for the global sourcing of IT and ITESaccounting for 55 per cent of the global market in offshore IT services and garnering 35 per cent of the ITES/BPOmarket.

India is one of the fastest-growing IT services markets in the world and there are reports that three-quarters oflarge Indian enterprises are planning to increase IT spending in 2013, with an average IT budget of $ 12.2million. The BPO sector including the domestic and exports segments continue to grow from strength tostrength, witnessing high levels of activity both onshore as well as offshore. The companies continue to move upthe value-chain to offer higher end research and analytics services to their clients. India's leadership position inthe global IT and BPO industries are based primarily on the following advantages. India's IT and BPO sectorexports are expected to grow by 12-14 per cent in FY14 to touch $ 84 billion - $ 87 billion. The Indian IT

infrastructure market is projected to grow by 9.7 per cent y-o-y to reach $ 2.1 billion in 2013. IT Industry bodyNational Association of Software and Services Companies (Nasscom) has created a separate unit to drive its newfound enthusiasm for software products, and has set a target of $ 10 billion in revenues from software productsby 2020.

Growth

Nasscom forecast information technology (IT) exports from India will grow 12-14% in the next fiscal, faster thanthe revised 10.9% growth it predicted for the year to 31 March, as economic recovery in the US and Europe mayprompt more companies to farm out work to India to save costs. An increase in global technology spending andopportunities created through adoption of technologies such as social media, mobility analytics and cloudcomputing are expected to spur growth in 2013-14.

In fiscal 2014, India's information technology and business process management (IT-BPM) industry is likely to add

$12-15 billion incremental revenue, a measure of market share growth that has evolved as the new benchmarkfor the Indian IT sector. The local IT market is expected to grow at 13-15%, driven by spends by the governmentand the banking, financial services and insurance (BFSI) sector

SECTOR COVERAGEDate: - 29THOct 2013


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Exports of computer software and information technology services

India's ITeS exports have lost momentum, as per the recently released Reserve Bank of India's annual survey ofexports of computer software and information technology services indicates that over the five-year period since

2007-08, though exports of both computer-related services and overall software services have increased, thepace has been lethargic. After recording relatively low rates of growth of 4.6 and 6.3 per cent in 2008-09 and2009-10, the industry appeared to be recovering its past momentum, with the rate touching 23 per cent in 2011-12. But the growth rate has slumped again to 9 per cent in 2011-12. To make the BoP and annual export surveyfigures comparable, the RBI adds on the exports of the overseas subsidiaries of Indian companies to its estimateof the exports of domestic firms. This total is close to, though not exactly equal to, the NASSCOM figure that isused in the balance of payments statistics. This is an advantage since the NASSCOM figures are available for alonger time period. If India's export performance in software and ITeS is measured using the NASSCOM-BoPfigures, the slowdown in export growth is even sharper.

The annual rate of growth of 'software services exports' rose from 19 to 38 per cent between 2001-02 and 2004-05, only to decline thereafter to a low of 7.4 per cent in 2009-10. It has since fluctuated in the 6-12 per centrange. This loss of software and ITeS export momentum at a time when India's current account deficit is wide,leading to a weakening of the rupee and uncertainty about the stability of capital flows, is of much significance.If we take the year 2012-13, provisional figures suggest that net invisible receipts (from services, remittancesand income from abroad), helped cover as much as 54 per cent of India's merchandise trade deficit or excess ofgoods imports over goods exports. Of these invisibles, net software export earnings amounted to as much as 60per cent. Hence, if the merchandise trade deficit remains high and rises, while software exports stagnate, theimpact on the current account deficit, India's overall balance of payments and the rupee can be damaging.


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Indian exports of software and IT-enabled services have been dependent on a few developed English-speakingmarkets and with the developed-countries still grappling with growth concerns, especially the US, the Indian ITindustry will take time to recover.

Indian rupee deprecation

India rupee, the worst performer among Asian currencies this year, plunged to a new historic low of 68/$ onconcerns about the impact on government's worsening finances while implementing the much-hyped foodsecurity Bill, which promises heavily subsidized grains to the poor. The currency has been into a tailspin afterFederal Reserve Chairman Ben Bernanke indicated that the quantitative easing programme could be taperedlater in the year. Any, tapering in liquidity by the US Fed on improved prospects would mean a reversal of dollar

inflows from emerging economies like IndiaThe falling Indian currency is a perfect metaphor for the free fall of Indian economy seems to be in, given thesub 5% GDP growth, snail-paced recovery in Industrial activity, burgeoning Current Account Deficit (CAD) andworrisome issue of global investors pulling out capital.

A weak currency might worsen the already-stressed trade deficit but on the same time a weaker rupee is goodnews for Indian software firms, most of whom derive over half of their revenue from the US. On average onepercentage point depreciation in the rupee translates into a 30-50 bps gain in operating margins for informationtechnology (IT) companies.

Government Initiatives for the sector

FDI up to 100 per cent under the automatic route is allowed in Data processing, software development andcomputer consultancy services; Software supply services; Business and management consultancy services, MarketResearch Services, Technical testing & Analysis services. The Government of India's move to do away with themandatory requirement of 10 hectares of minimum land area for setting up an IT and ITeS special economiczones (SEZ) is expected to provide a major boost to the real estate and IT sector. The Cabinet has recentlyapproved the National Policy on Information Technology 2012. The policy aims to increase revenues of IT andITES industry from $ 100 billion to US$ 300 billion by 2020 and expand exports from $69 billion to $ 200 billion by2020. The Government of India also plans to set up 15 new laboratories for testing hardware and softwareproducts under public-private partnership (PPP) model. Not only the central government but various state

government's too are taking various measures for the growth of the IT sector- The Government of West Bengalplans to spend Rs 41 crore ($ 7.37 million) to roll out citizen-centric services electronically across 19 districtsincluding Kolkata. Kerala has set an ambitious target of becoming a cent per cent digital state in governance.The State has around 600 small, medium and large IT firms employing over 80,000 professionals directly andnearly three times the number indirectly.

Concerns

Indian IT companies are concerned about a proposed US legislation that restricts the issue of H1-B visas. Keypoints of the legislation include, requiring all companies to make a good faith effort to hire Americans first;prohibiting employers from advertising only to H1B visa holders; and prohibiting companies from outsourcing visaholders to other companies. It was reported that of the top 12 companies which bagged more than 40,000 of the134,740 H1B visas approved in 2012 all had a strong India presence. India has long lobbied against a 2010 U.S.


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law that significantly increased fees for visa applications, saying it violates the country's commitments on tradein services. Government has been saying that it will file a formal complaint to the World Trade Organizationagainst the US over its visa policies. Though, industry body NASSCOM has said that Indian software industry neednot panic at the US Immigration Bill as some of the provisions are positive and another bill is also underpreparation by the American government which is has positive features for the domestic industry. Though, thelegislation is still not a law but if implement, the higher visa fee will effectively reduce the availability of visas.

Road Ahead

Globalization has a profound impact in shaping the Indian IT industry over the years with India capturing asizeable chunk of the global market for technology sourcing and business services. Over the years the growth

drivers for this sector have been the verticals of manufacturing, telecommunication, insurance, banking, financeand of late the fledgling retail revolution. As the new scenario unfolds it is getting clear that the future growthof IT and ITeS will be fuelled by the verticals of climate change, mobile applications, healthcare, energyefficiency and sustainable energy. Traditional business strongholds would make way for new geographies, therewould be new customers and more and more of SMEs will go for IT application and services.

Demand from emerging countries is expected to show strong growth going forward. Tax holidays are alsoextended to IT sector for STPI and SEZs. Further, the country is providing procedural ease and single windowclearance for setting up facilities. Growth in offshoring is expected to outclass the growth in overall IT spendacross the various verticals. Offshoring as a per cent of total spend is also expected to rise across the variousverticals. India has the opportunity to tap the growing offshoring market with its cost advantage, expertise andhuge talent pool. Going forwards the Indian IT sector is likely to derive nearly 20 percent of the business fromnew geographies by 2020 with transport, healthcare, utilities, media and others adding to the present verticalsof financial services, hi-tech and telecom and manufacturing sectors being served by Indian companies.

Industry Statistical AnalysisKey Industry ratio

Description 2013 2012 2011 2010 2009

Company count 97 97 97 97 97

Margin Ratios

EBITDA Margin(%) 31 31.37 30.32 31.44 27.09

EBIT Margin(%) 28.05 28.96 27.08 28.04 23.57

Pre Tax Margin(%) 27.06 27.82 26.31 27.31 22.99

Performance Ratios

ROA(%) 17.82 18.61 17.93 18.87 19.12

ROE(%) 25.96 26.96 26.31 28.58 28.79

ROCE(%) 30.47 31.5 28.08 29.57 28.79

Asset Turnover(x) 0.85 0.85 0.82 0.82 0.95Sales/Fixed Asset(x) 3.58 3.58 3.44 3.35 3.99

Working Capital/Sales(x) 2.41 2.47 2.33 1.84 2.4

Efficiency Ratios

Fixed Capital/Sales(x) 0.28 0.28 0.29 0.3 0.25

Receivable days 81.66 76.94 71.62 74.96 72.84

Inventory Days 2.11 2.7 2.92 2.85 2.44

Payable days 43.06 41.31 38.75 35.45 27.87

Growth Ratio

Net Sales Growth(%) 16.44 22.75 18.74 5.41 23.83

Core EBITDA Growth(%) 14.98 26.97 14.51 22.32 9.59

EBIT Growth(%) 12.7 31.25 14.67 25.38 7.5

PAT Growth(%) 12.52 21.96 12.68 20.65 6.19Financial Stability Ratios

Total Debt/Equity(%) 0.13 0.13 0.14 0.17 0.16

Current Ratio(x) 2.27 2.29 2.38 2.81 2.53

Quick Ratio(x) 2.26 2.27 2.35 2.79 2.51

Interest Cover(x) 28.47 25.46 35.24 38.43 40.67


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Aggregated Industry Balance Sheet

DESCRIPTION 2009 2010 2011 2012 2013

No of Companies 97 97 97 97 97

Share Capital 3564.4 3798.63 4204 4174.94 4875.1

Share Warrants & Outstandings 527.68 508.91 350.53 833.98 486.57

Total Reserves 72852.76 91194.43 111293.61 133272.68 156475.12

Shareholder's Funds 76944.84 95501.96 115848.14 138281.6 161836.79

Minority Interest 552.81 614.45 709.54 878.31 1187.43

Long-Term Borrowings 526.26 1157.37 1232.95Secured Loans 4187.99 7607.33 5582.38 6095.03 7291.14

Unsecured Loans 10710.82 12233.98 4948.6 4779.86 2539.9

Deferred Tax Assets / Liabilities -442.43 -1048.57 -1110.54 -1155.09 -1635.21

Other Long Term Liabilities 1223.59 1829.62 1832.9

Long Term Trade Payables 76.87 127.44 178.73

Long Term Provisions 1816.44 2745.85 3372.73

Total Non-Current Liabilities 14456.38 18792.74 12537.35 14422.71 13580.18

Trade Payables 9179.07 11052 11947.11 13103.26 14735.46

Other Current Liabilities 12996.58 11120.67 13676.02 18548.22 23587.88

Short Term Borrowings 6635.41 7301.28 9667.35

Short Term Provisions 8583.82 13311.45 12488.8 16086.41 18319.72

Total Current Liabilities 30759.46 35484.12 44747.35 55039.17 66310.4

Total Liabilities 122713.49 150393.28 173842.38 208621.79 242914.8

Non-Current Assets

Gross Block 53395.26 61340.39 68345.08 80068.39 87965.77

Less: Accumulated Depreciation 16227.78 19339.02 22765.11 26594.01 30421.91

Less: Impairment of Assets 0.06 21.72 147.91 158.98 167.17

Net Block 37167.42 41979.65 45432.06 53315.4 57376.69

Lease Adjustment A/c

Capital Work in Progress 5367.61 5483.74 3718.59 4629.79 6171.73

Intangible assets under development 768.36 1012.81 1255.73

Pre-operative Expenses pending 6.13

Assets in transitNon Current Investments 2161.74 5510.03 5363.19 6126.78 7202.44

Long Term Loans & Advances 10243.66 14121.6 16469.45

Other Non Current Assets 0 0 4329.61 5033.24 4542.89

Total Non-Current Assets 44696.77 52979.56 69855.47 84239.62 93018.93

Currents Investments 5555.47 13018.91 10560.1 10774.05 16512.61

Inventories 1166.83 1300.79 1702.67 2061.86 1714.46

Sundry Debtors 26119.43 25824.03 32416.23 41504.23 46821.58

Cash and Bank 25266.51 30365.59 37589.57 45037.62 49991.08

Other Current Assets 6513.09 8589.7 11377.14 15834.07 19977.45

Short Term Loans and Advances 13367.15 18264.94 10209.92 8865.14 14343.55

Total Current Assets 77988.49 97363.96 103855.62 124076.98 149360.73

Miscellaneous Expenses not written off 28.23 49.76 131.28 305.2 535.14

Total Assets 122713.49 150393.28 173842.38 208621.79 242914.8

Contingent Liabilities 10545.27 13670.33 12377.16 12318.81 14252.13

Book Value 418.39 511.55 644.34 752.3 881.03

Adjusted Book Value 418.39 511.55 644.34 752.3 881.03

Total Current Assets Excluding CurrentInvestments 72433.02 84345.06 93295.53 113302.93 132848.12

Net Current Assets (Including CurrentInvestments) 47229.02 61879.84 59108.27 69037.81 83050.33

Total Debt 14898.81 19841.31 19039.88 19995.32 23578.92


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Aggregated Industry Profit & Loss Statement

DESCRIPTION 2009 2010 2011 2012 2013


Gross Sales 119055.44 128933.44 152240.67 187492.22 219810.37

Less: Inter divisional transfers

Less: Sales Returns

Less: Excise Duty 128.79 102.71 118.65 130.99 11.6

Net Sales 118926.65 128830.72 152122.02 187361.23 219798.78

Increase/Decrease in Stock -132.72 -174.08 -45.36 -208.25 -220.72Raw Material Consumed 6623.65 6879.73 7991.56 11160.9 8210.76

Power & Fuel Cost 926.1 1019.54 1178.92 1367.96 1574.49

Employee Cost 56211.88 61083.57 73583.21 91063.53 111322.8

Other Manufacturing Expenses 6985.96 6629.9 6856.8 8581.53 11499.7

General and Administration Expenses 10410.18 10356.89 11686.01 13275.67 14948.6

Selling and Distribution Expenses 1099.51 1181.39 1151.1 1446.68 1042.63

Miscellaneous Expenses 4538.22 2979.78 2630.24 3779.51 3958.54

Less: Expenses Capitalised

Total Expenditure 92936.92 97199.9 115278.28 144086.16 168441.07

Operating Profit (Excl OI) 25989.73 31630.82 36843.74 43275.08 51357.71

Other Income 3256.41 3379.25 4080.24 6428.06 6864.46Operating Profit 29246.13 35010.08 40923.98 49703.14 58222.16

Interest 766.11 1053.96 1204.77 1598.33 1841.26

PBDT 28480.03 33956.11 39719.21 48104.81 56380.9

Depreciation 3838.44 4413.76 4779.62 5579.55 6588.23

Profit Before Taxation & ExceptionalItems 24641.58 29542.35 34939.59 42525.26 49792.67

Exceptional Income / Expenses -203.13 -64.9 -174.03 -154.77 -249.62

Profit Before Tax 24438.45 29477.45 34765.56 42370.49 49543.05

Provision for Tax 3368.49 4915.1 6397.54 10629.55 12169.26

Profit After Tax 21069.96 24562.35 28368.02 31740.93 37373.79

Extra items 40.69 71.06 -22.67 -20.16

Minority Interest -109.02 -145.96 -202.3 -167.17 -244.22

Share of Associate 97.17 141.21 34.12 687.84 603.05

Other Consolidated Items -0.3 1.04 -22.79

Consolidated Net Profit 21098.81 24628.66 28199.54 32239.98 37689.67

Adjustments to PAT -28.79 20.54 18.46 88.55 -502.58

Profit Balance B/F 24239.62 34920.67 44766.42 58915.51 75171.71

Appropriations 45309.63 59569.86 72984.41 91244.04 112358.81

Equity Dividend % 1400 2000 1400 2500 2200

Earnings Per Share 104.69 108.71 132.43 145.66 164.84

Adjusted EPS 104.69 108.71 132.43 145.66 164.84


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Aggregated Industry Cash Flow Statement

DESCRIPTION 2009 2010 2011 2012 2013


Gross Sales 119055.44 128933.44 152240.67 187492.22 219810.37

Less: Inter divisional transfers

Less: Sales Returns

Less: Excise Duty 128.79 102.71 118.65 130.99 11.6

Net Sales 118926.65 128830.72 152122.02 187361.23 219798.78

Increase/Decrease in Stock -132.72 -174.08 -45.36 -208.25 -220.72Raw Material Consumed 6623.65 6879.73 7991.56 11160.9 8210.76

Power & Fuel Cost 926.1 1019.54 1178.92 1367.96 1574.49

Employee Cost 56211.88 61083.57 73583.21 91063.53 111322.8

Other Manufacturing Expenses 6985.96 6629.9 6856.8 8581.53 11499.7

General and Administration Expenses 10410.18 10356.89 11686.01 13275.67 14948.6

Selling and Distribution Expenses 1099.51 1181.39 1151.1 1446.68 1042.63

Miscellaneous Expenses 4538.22 2979.78 2630.24 3779.51 3958.54

Less: Expenses Capitalised

Total Expenditure 92936.92 97199.9 115278.28 144086.16 168441.07

Operating Profit (Excl OI) 25989.73 31630.82 36843.74 43275.08 51357.71

Other Income 3256.41 3379.25 4080.24 6428.06 6864.46

Operating Profit 29246.13 35010.08 40923.98 49703.14 58222.16

Interest 766.11 1053.96 1204.77 1598.33 1841.26

PBDT 28480.03 33956.11 39719.21 48104.81 56380.9

Depreciation 3838.44 4413.76 4779.62 5579.55 6588.23

Profit Before Taxation & ExceptionalItems 24641.58 29542.35 34939.59 42525.26 49792.67

Exceptional Income / Expenses -203.13 -64.9 -174.03 -154.77 -249.62

Profit Before Tax 24438.45 29477.45 34765.56 42370.49 49543.05

Provision for Tax 3368.49 4915.1 6397.54 10629.55 12169.26

Profit After Tax 21069.96 24562.35 28368.02 31740.93 37373.79

Extra items 40.69 71.06 -22.67 -20.16

Minority Interest -109.02 -145.96 -202.3 -167.17 -244.22

Share of Associate 97.17 141.21 34.12 687.84 603.05

Other Consolidated Items -0.3 1.04 -22.79

Consolidated Net Profit 21098.81 24628.66 28199.54 32239.98 37689.67

Adjustments to PAT -28.79 20.54 18.46 88.55 -502.58

Profit Balance B/F 24239.62 34920.67 44766.42 58915.51 75171.71

Appropriations 45309.63 59569.86 72984.41 91244.04 112358.81

Equity Dividend % 1400 2000 1400 2500 2200

Earnings Per Share 104.69 108.71 132.43 145.66 164.84

Adjusted EPS 104.69 108.71 132.43 145.66 164.84


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