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Slowing mobile subscriber additions to lead to slower growth
The domestic IT enabled services (ITeS) industry (defined as ITeS companies catering to the Indian market) currently generates 15
per cent of the total Indian ITeS revenues and employs 25-30 per cent of the country's total ITeS workforce. Telecom and BFSI are
the major verticals, accounting for 56 per cent and 32 per cent respectively of the overall domestic ITeS industry. The industry has
been growing at a blistering pace over the last 5 years (32 per cent CAGR) on the back of growing telecom subscribers. Even as the
exports market slowed down considerably in 2009-10, the domestic ITeS industry grew at 28 per cent. However, we expect lower
subscriber additions and increasing automation to bring down revenues from the telecom vertical.
Banking and Insurance companies, the second largest vertical for the domestic ITeS vendors, is expected to grow on the back of
expanding client base and innovative product launches. Additionally, newer verticals like Government, travel, aviation, retail and
media are increasingly outsourcing their back-end operations to manage costs and focus on their core competencies. We expect
these verticals to gain in share over time although the telecom and BFSI verticals will continue to remain the largest revenue
contributors.
CRISIL Research expects the domestic ITeS industry to grow at a 15 per cent CAGR over the next 3 years to Rs 163 billion or $3.5
billion ($1=Rs 46.8), thus constituting 18 per cent of the total Indian ITeS industry.
Domestic ITeS growth
Source: CRISIL Research
Revenues from telecom to slow down
The telecom vertical accounts for a majority of revenues for domestic ITeS players. Revenues from this vertical are expected to
grow at a CAGR of 12 per cent over 2009-10 to 2012-13 as against a 56 per cent CAGR growth over the last 4 years (2005-06 to
2009-10) due to certain industry dynamics, which are expected to restrain revenues:
Interactive voice response systems: IVR is the technology used to automate interactions with telephone callers. Clients are
increasingly resorting to IVR to reduce cost of sales, support and enquiry. Currently, approximately 40 per cent of the total
inbound calls are resolved through IVR. This number is slated to grow by leaps and bounds over the next couple of years.
Additionally, IVR solutions are now increasingly used to place outbound calls to convey information about new products and
services, overdue bills, etc.
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National Do-Not-Call (NDNC) Registry: NDNC is a database of all telecom subscribers who do not wish to receive
unsolicited commercial communication. The Telecom Regulatory Authority of India (TRAI) will implement guidelines to
check telemarketing calls from March 1, 2011. Once guidelines are implemented, telemarketers will have to check their
databases and ensure that those registered with NDNC are not called for commercial purposes. Strict penalties would be
charged to those who flout the norms.
Charges on inbound customer queries: BPOs are estimated to earn 20-25 per cent of their revenues from inbound calls for
telecom players. Toward the end of 2009-10, telecom companies introduced charges (50 paisa for 3 minutes) on customers
calling call centers for information-based services. Most of the leading telecom operators have levied these charges. These
charges are expected to be deterrents, as we expect inbound call volumes in the telecom vertical to fall by about 30-40 per
cent in 2010-11 and remain low going ahead. Complaint calls continued to remain free of cost.
Consolidation in the telecom space: As the 3-year lock-in period for promoter's stake sale in 2G licenses expires in January
2011, some of the new telecom operators are expected to consolidate with larger incumbents leading to vendor
consolidation. This is expected to drive down average billing rates for the industry in the telecom space.
Mobile subscriptions, however, will continue to grow in semi urban and rural markets. 3G services, expected to be launched by
various service providers, are also expected to boost BPO revenues as telecom companies step up their marketing efforts.
Domestic ITeS vertical mix
Source: CRISIL Research
Increased IT adoption by public sector banks to drive growthDomestic BPOs support the retail products segments of banks by way of credit cards, cross selling of products, customer services
and back-office operations as key offerings. Demand for credit cards and other retail products fell drastically in 2009-10;
banks became stricter with their disbursals causing volumes for banking voice and transaction services to fall.
This market is also predominantly serviced by captive BPOs of the banks. Captives account for more than 70 per cent of this
market, as regulations prevent banks from sharing certain client data. Captives also enable banks to better cross sell their products.
Competition in the system has forced public banks to become more customer-friendly and approachable in terms of technology.
Higher penetration of existing products, stiffer competition, increased need to control costs and innovation in financial products are
likely to encourage the usage of third party vendors by banks. The BFSI vertical is estimated to account for nearly 32 per cent of
domestic ITeS revenues in 2009-10 and is expected to grow at 14 per cent CAGR over the next 3 years.
Captives account for a majority of the domestic ITeS industry's share in 2009-10
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Source: CRISIL Research
Growth in other verticals
Business from retail and travel to grow rapidly
The retail and consumer goods segments are expected to grow rapidly in the country given the average consumer's increasing
disposable income. Expansion of operations will require organised and scalable units to manage supply chain logistics and
procurement, a space where domestic ITeS vendors are expected to grow. Increase in domestic rail and air travel and tourism is
expected to increase business volumes for domestic BPOs as well. We also expect significant increase in Finance & Accounting
(F&A) and payroll-related activities, as these services can be provided using standardised software tools. Over the next 2 years,
CRISIL Research expects these verticals to grow in share to 10-11 per cent of the entire market from an estimated 7-8 per cent in
2009-10.
Vertical-wise growth drivers
Government IT initiatives to provide opportunities in the long term
Over the last few 3-5 years, the government has taken up projects to upgrade IT infrastructure. IT initiatives by the government for
e-governance, key infrastructure like railways, roads, ports, defence and utilities require significant IT infrastructure, support and
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technical assistance. The National e-Governance Plan (NeGP) is one such IT initiative of the government. It has three core
initiatives, which include providing secure access to states, providing them with data management facilities and kiosks to deliver
services to people. The unique ID programme will enable insurance providers, banks, and telecom operators to use one ID card as
proof of identity and enable them to provide services to a wider section of the society, which was so far largely excluded.
Increased focus on IT in areas like railways, passport services, income tax department and various e-governance projects provides
ample opportunity for domestic BPO players to manage grievance cells, process documents for bill payments, taxation etc and
conduct surveys. Share of the government vertical is expected to reach 6 per cent over the next 3 years from about 4.5 per cent in2009-10.
Service line wise split
Source: CRISIL Research
Transaction services to grow in share
With a share of nearly 70 per cent, the voice business dominates the domestic ITeS industry. Transaction services, on the other
hand, account for close to 25 per cent. Over the next 3 years, the voice business is expected to grow slowly at about 15 per cent
CAGR as compared to the 25 per cent CAGR of the last 5 years (2004-05 to 2009-10). It is expected to account for 68 per cent of
the overall share of domestic ITeS industry by the end of the forecast period. The slower growth can be attributed to the higher
usage of IVR leading to lower billing rates, lower volumes of inbound calls and high competition in the telecom space, which will
force the service provider to cut billing rates to help operators preserve margins. During the same period, transaction services are
expected to increase in share to 26 per cent, as demand for procurement, logistics, finance & accounting (F&A) and payroll services
increases with growth in retail and consumer goods business.
Porter's five force analysis for the domestic ITeS industry
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Source: CRISIL Research
Profitability outlook of domestic ITeSAs stated earlier, domestic ITeS players earn lower margins than their export counterparts. According to CRISIL Research, as of
2009-10, exports ITeS players earned operating margins of 12-15 per cent, while domestic players earned margins of 8-10 per cent,
500-600 bps lower. Apart from billing rates, employee cost also differentiates margins of export and domestic ITeS players. Owing to
the soaring attrition, employee costs as a percentage of sales of domestic ITeS players are significantly higher than exports ITeS
players. Domestic players recruit under-graduates who have a high propensity to switch or leave jobs due to academic reasons.
This does not allow the employee to move up the learning curve swiftly and consequently, dents the organisations' margins.
We have detailed the differences between exports BPO and domestic BPO to understand key parameters impacting profitability:
Difference between exports BPO and domestic BPO
We expect domestic ITeS companies to maintain margins at current levels in 2009-10 and 2010-11. Their capacity to manage
attrition and subsequently, employee costs, capability to maintain billing rates and move to and operate from tier-II cities will affect
their future profitability given the lower employee and real estate costs.
Diversification and provisioning of high value transaction services key to growth
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The domestic ITeS market has grown on the back of voice and transaction services outsourcing by telecom players and banks.
However, growth in the telecom sector will be limited due to the increased use of IVR and the high competitive intensity in the
telecom space, which will enforce a decline in margins for the BPO players supporting them. BPO players, thus, need to consider a
more productised approach at delivering services to domestic clients and diversify their client base beyond telecom and banking.
As transaction services enjoy higher billing rate and require a higher degree of skill sets over plain vanilla voice services, we expect
domestic players to increase their focus on transaction services like procurement, logistics, F&A and payroll. All these services are
fairly standardised and amenable to be outsourced to a third party service provider.
With a slowdown in BPO services exports, many of the large players had started focusing on the domestic segment as well and will
continue to slowly bring in process efficiencies developed over a period of time to the domestic market. However, as the domestic
market is more cost sensitive than the exports market, this process will happen over a longer period of time.
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