Before I Forget…

India’s IT services market is forecast to grow to US$10.73 billion by 2011, at a five-year compound annual growth rate of 23.2%, as outsourcing emerges as a more favored option for companies in India, according to research firm Gartner…..IBM, Tata Consultancy Services (TCS) and Wipro together accounted for 26.1% of IT services vendor market share in India last year, according to Gartner.  IBM was the top vendor, with 11.2% market share. TCS and Wipro occupy the second and third positions with 10.9 and 4.1% market shares, respectively.  However, the Indian IT services market is still fragmented, with the majority of the market being serviced by smaller local players that account for close to 40% of the IT services market, according to Gartner…..The key segments of the Indian IT services market are hardware maintenance and support, software support, consulting, development and integration, IT management, and process management, Gartner said.

Reference : http://www.nytimes.com/idg/IDG_002570DE00740E18002573D8
00326939.html

Infosys Technologies on Friday said it was developing new businesses that were moving away from the traditional outsourcing model of charging clients based on the number of staff needed for a job.  The move comes as rapidly escalating wage costs in India and an appreciating rupee are putting pressure on IT companies’ margins, forcing the sector to move away from the “body shop” model, under which it was dependent mainly on cheap labour for profits.  S Gopalakrishnan, chief executive of the Indian IT services group, who on Friday released the company’s third-quarter results, told the Financial Times the aim was “to create new growth engines”.  For example, the company was introducing a “software-assisted-services” business unit under which, rather than just developing software and then handing it over to the client, Infosys would retain ownership of the software and charge the client on a pay-per-use basis.  This saves the client the cost of maintaining and hosting the software while Infosys gets a longer-term revenue stream out of the product.  The initial software development phase is labour-intensive. But, after that, the need for large numbers of expensive software engineers trails off even as revenue rises.  “The tail is much longer – you continue [to] get revenue as long as they use the software,” Mr Gopala-krishnan said.  The company is also setting up other units that combine its skills in providing software services with back- office processing, covering areas such as procurement, human resources, staff training and education and learning outsourcing.  Infosys reported a 25% year-on-year increase in net profit to Rs12.3bn ($314m) for the three months ended December.

Reference : http://www.ft.com/cms/s/0/1d995582-c06e-11dc-b0b7-0000779fd2ac.html

Infosys Technologies admitted yesterday that its China operations were growing more slowly than expected, with the company’s customers preferring to use its English-speaking outsourcing base in India.  The comments from India’s second-largest computer services company highlight how China is failing to fulfil its early promise for Indian outsourcers of becoming a rapidly growing alternative pool of talent.  “It is growing slower than expected primarily because the global customers have not taken to China as much as we wanted them to,”S. Gopalakrishnan, Infosys’s new chief executive, said in his first meeting with the press.  “It’s also because India is the ideal location for offshore outsourcing today and there’s no driver to increase their exposure to China at this point.”  Infosys has a base of 700 employees in China in Shanghai and Hangzhou, while India’s number one software firm, Tata Consultancy Services, has more than 1,000 employees, most of them in a joint venture with Microsoft and three state-owned companies.  TCS had to wait 12 months before it was able to officially seal the joint venture last year, illustrating the comparative complexity of doing business in China.  Infosys has chosen to go it alone.  But it has not had any more success in scaling up in China because its customers, who are mostly based in the US and Europe, prefer India, with its base of English speakers and established reputation for outsourcing.  But Mr Gopalakrishnan said that in the longer term, Indian outsourcers could not afford to ignore China.  “China produces about 650,000 engineers every year and India produces 450,000 engineers, and the US produces 100,000 engineers,” he said.  “So you can see, if you want to continue to scale up, you have to look at locations like China.”

Reference : http://www.ft.com/cms/s/0/08401ba8-568d-11dc-ab9c-0000779fd2ac.html

Only half a century after the end of colonial rule, Indian companies are coming to Europe to build empiresof their own.  Mittal led the way with the takeover of Arcelor in 2006.  After five years of terrific growth, as outsourcing went global, might India’s IT services companies leadthe next wave of consolidation?  That hope looks premature.  In terms of market capitalisation, the big Indian trio - Tata Consultancy Services, Infosys and Wipro - are far larger than their European rivals.  But this is thanks to valuations of 3-4 times sales, which reflect high levels of profitability, and top lines that are expanding by about 30% a year.  The actual businesses are still much smaller.  All three will have sales of about €3bn-€3.5bn this year compared with Cap Gemini’s €8.8bn.  More than doubling in size at a stroke, in addition to managing integration across several countries, would be a big leap for historically conservative Indian managements.  And it would not make much sense either.  As the likes of Hewlett-Packard have demonstrated, putting together sizeable people-based businesses is often a recipe for squandering the value tied up in customer relationships, culture and the accumulated knowledge of staff.  It would also be an expensive way to gain the strong “onshore” presence in Europe that is perceived to be necessary to compete for higher value work.  This might better be achieved by poaching the right people or through small deals that add specific consulting expertise.  A big European purchase would also dramatically hit the superior growth rates and margins of the Indians.  Domestic consolidation to take out costs first seems a more sensible route to building a group with global scale.  With a structural cost advantage relative to western counterparts and plenty of growth at home, there is more than one way to take on the old imperialists.

Reference : http://www.ft.com/cms/s/1/818c58fc-52a3-11dc-a7ab-0000779fd2ac.html

MARKET

Gartner reports that Indian cellular services revenues were US$ 8.95 billion in 2006 and are projected to grow at a compound annual growth rate (CAGR) of 18.4% from 2007 to 2011 to reach US$ 25.617 billion. 

• Data revenues will outpace growth of voice revenues and contribute 22% of revenue in 2011 from 9.6% in 2006, according to this latest Gartner forecast. 
• India will continue to be the fastest growing country in APAC in terms of mobile telephony after China and promises to become more dynamic with the entry of Vodafone. 
• “With more marginal users forming the bulk of the addressable market, low service costs and inexpensive handsets will help to unlock the inertia and facilitate adoption of mobile services,” said Madhu Gupta, a senior research analyst at Gartner. 
• “Call rates have reduced significantly to about 2.6 cents per minute.  However, this remains high compared with fixed-line rates at 0.9 cents per minute.  Gartner expects prices to drop in order to become more competitive with fixed-line rates, further lowering the barrier to entry.  This trend, coupled with the emerging-market handset initiative by vendors and operators, will boost adoption of mobile services in India’s semi urban and rural provinces.”

PENETRATION

Mobile connection growth in the Indian market is on an upward trajectory, and robust growth will continue until 2011.  The market is forecast to grow 23% CAGR during the five-year forecast period, growing to more than 462 million connections.  With the following factors (listed below), cellular market penetration is projected to increase from 12.7% in 2006 to 38.6% in 2011. 

• This overall penetration will primarily be driven by an increased focus on the rural market, aggressive promotions by the players and handset bundle offers.  By 2011, Gartner expects 58% of the rural population and 95% of the urban population to be covered with mobile connections.
• Mobile penetration in the rural market is low at 2%, but this represents an immense opportunity for the cellular service providers. Handset manufacturers are therefore concentrating on launching sub US $25 mobile handsets. 
• Businesses are expanding into India’s smaller towns and cities where fixed-line connectivity is limited and often nonexistent.  Enterprises will use mobile services for intra-company, as well as inter-company, communications.  Gartner expects enterprise service plans offered by mobile services players to become distance independent.  This will be a big incentive for companies to use mobile phones, not only because call rates are comparable to fixed-line rates, but also because of the benefit that mobility gives their employees, especially while travelling or in remote locations. 

CHARACTERISTICS

• The Indian market is driven by prepaid connections, which accounted for more than 84% in 2006 and expected to grow to more than 93% of the connection base by 2011.  Therefore the voluntary churn rate in India is 30.6% (2006), and despite a maturing market the ratio is expected to go up to 41% in 2011.
• The revenues from data services will significantly contribute to the growth of overall cellular services revenues in India, with a CAGR of 36.8% in the forecast period.  Prepaid subscribers are expected to adopt data services faster than the post-paid segment.  Data revenues for the prepaid segment are projected to grow at 46% CAGR during the forecast period as compared to 22% for the post-paid subscribers during the same period.  The bulk of the revenues will continue to come from voice services.  However, with the increased growth in data services, the percentage of revenues coming from voice will reduce from 90% in 2006 to almost 78% percent in 2011.
• Large players will have an advantage as they expand their presence and take advantage of economies of scale.  But they will face tremendous challenges in finding the right balance between yield and market share.  Customers with low disposable incomes will form a significant proportion of the base.  As a result, ARPUs (Average Revenue Per User)/Year will continue to decline through the forecast period.  In 2006 the average ARPUs/Year of players was USD 82.1, which will further reduce to USD 59.5 by 2011.  “Operators will have to look beyond revenue growth to stem erosion of their bottom lines.  They will need to adopt measures to optimize cost associated with business operations and network management.  More operators are likely to collaborate in terms of infrastructure sharing and outsourcing their network management to equipment vendors and, possibly, system integrators,” said Mr. Gupta. 
• In India spectrum remains a scarce resource and is tightly controlled.  This could have an impact on expansion plans and the quality of service because of inadequate investment in or upgrading of the networks.  Existing license conditions, such as a high revenue share, take away significant resources that could be used for investing in networks and market development activities.  “With the intensifying competition, the release of 3G spectrum will help in bridging the gap generated because of lower voice tariffs and handset subsidies.  The release of 3G will be essential to sustain the growth in the cellular services market,” concluded Mr.Gupta.
   
  Reference : http://www.tekrati.com/research/News.asp?id=9144