India's IT Infrastructure Services

IT Infrastructure Services

Sectoral Risk Outlook

October, 2012.

Dun & Bradstreet Information Services India Private Limited.

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TABLE OF CONTENTS

EXPLANATION OF RISK SCORE ............................................ 3

EXECUTIVE SUMMARY .................................................... 4

PRODUCT PROFILE ...................................................... 5

MACRO ECONOMIC ANALYSIS .............................................. 7

Macro Economic Growth ...................................................................................................... 7

Quarterly Performance .......................................................................................................... 9

Interest Rate Risk ................................................................................................................ 11

Foreign Exchange Fluctuations ......................................................................................... 13

GOVERNMENT REGULATIONS .............................................. 14

Government Initiatives ........................................................................................................ 14

DEMAND SUPPLY DYNAMICS .............................................. 15

Market Size ........................................................................................................................... 15

Exports ................................................................................................................................. 16

Demand Drivers ................................................................................................................... 19

Projections ........................................................................................................................... 21

COMPETITIVE SCENARIO ................................................ 22

Nature of Industry ................................................................................................................ 22

Recent IS Outsourcing Contract ........................................................................................ 25



Sectoral Risk Outlook Page 3

EXPLANATION OF RISK SCORE

Industry Risk Score reflects the effect that the various factors have on

the business prospects and operating environment of the industry over

the next 12 months. The risk score arrived at is an aggregate of the

individual scores assigned to the relevant industry parameters

identified.

The selected parameters are government regulations, demand supply

dynamics, competitive scenario, macro-economic variables, resource

risk and profitability and cost structure. The scores given to individual

parameters reflect the extent of positive/ negative impact on the

business operating environment.

The industry risk scores have been graded on an 8 point scale with 1

indicating low risk and 8 indicating high risk.

Industry Risk Score 3

Favorable Factors (+) Unfavorable Factors (-)

Government of Indias focus on e-

governance plans augurs well for

the IT infrastructure industry.

Emergence of other low cost

destinations may affect Indian off-

shoring concept.

Several IS Outsourcing contract

bagged by industry players are

expected to push the sales growth

of the leading IT players and

contribute towards the overall

revenue growth of IT industry.

Global majors have also made

India as their base of operations.

With access to low cost operations,

these companies try to minimize

major competitive advantage of

Indian competitors.

In the wake of rapid changing

technology, rising cost of

ownership, increasing work

related complexities, government

as wells as corporate are

increasing adopting for managed

IT services.

D&Bs assessment of the industry risk score is based on assessment of the

sector specific risk factors and a sectors relative standing amongst other

sectors within D&Bs portfolio of industries.




EXECUTIVE SUMMARY

IT Infrastructure Management Service (also referred as IS outsourcing)

cover the entire spectrum of IT Infrastructure and the complete life cycle

of IT Services. IT Infrastructure Services caters to the organisations

computer hardware, network and system security related needs.

Rapid changing technology is creating robust scope for the growth of

Infrastructure-as-a-Service (IAAS). Revenues from the IT Infrastructure

Services have grown from ~INR 182 Bn in FY 2008 to ~INR 410 Bn in

FY 2012, registering a CAGR of 23%.

Export revenues from IT Infrastructure Services grew at CAGR of 29 %

over the same period. Their share to total export earnings of the IT

Services industry increased from 13.5% to 18.4% over the period FY

2008-12.

Growing preference towards offshoring of IT Infrastructure Services,

increasing IT spending by Indian companies for internal needs along

with IT support for infrastructure development companies as well as

increasing Indian Government spend are leading to growth of IT

Infrastructure Services.

Major companies in this service offering include Wipro, HCL, TCS,

Infosys, Tulip Telecom among others, with Wipro being a major player.

Apart from these companies there are some foreign companies which

also offer IT services bundled with their product offerings. Increasing

demand has also led to emergence of specially focused companies

such as Allied Digital and Glodyne Technoserve.

Cloud Computing especially storage facilities offered on cloud are

expected to provide new growth avenues for IT Infrastructure Services

providers.

Revenue from IT Infrastructure Services is expected continue growing

at a healthy double digit CAGR of 23% to increase to ~INR 775.8 Bn by

FY 2015.




IT Infrastructure Services

Managed Hosting

and Co-Location

Services

Desktop Support

Remote Monitoring

and Management

Device and

Performance Mgmt

Safety and Fault

Management

Storage

Management

Vulnerability

Assessment

Content Protection

IT Service

Desk

Data Centre Services

Network (LAN,

WAN) Services

Enterprise

Security

Services

PRODUCT PROFILE

IT Infrastructure Services cater to the organisations computer

hardware, network, system security and disaster recovery related

needs.

The service providers are entrusted with managing and maintaining

desktop, laptop and mainframe computers, handheld devices, printers,

operating systems. They are also responsible for e-mail management,

data communications, telecommunications network, firewalls as well as

storage management.

Following exhibit depicts gamut of IT Infrastructure Services:

Exhibit 1 : Range of IT Infrastructure Services

Source: D&B Research

Growing operational complexities, globally spread operations,

requirement to handle huge data and hence, necessity to utilize huge




number of IT products has led to burgeoning demand for IT

Infrastructure Services.

Global spend on IT Infrastructure Services increased by 1.5% in CY

2011. The share of global spending on various IT infrastructure services

is estimated to account for about 78% of the total IT Outsourcing

services spending in 2011.

Exhibit 2 : Global Spending on IT Infrastructure Services (2011e)

Source: Nasscom, D&B Research

Key Benefits of IS outsourcing

Optimal use of resources

Process Automation

Reduce technology complexities

Compliance Management helps in Managing risk

Cost optimization

Global Spending on IT

Infrastructure Services: USD

187.8 Bn

Infrastructure Outsourcing: USD 114.1Bn

Network and Desktop

Outsourcing: USD 44.3 Bn

Hosting Infrastructure Services: USD

29.4 Bn




MACRO ECONOMIC ANALYSIS

Macro Economic Growth

Indias GDP has grown at a CAGR of ~7.86% over the period FY 2007-

12 while Index of Industrial Production (IIP) grew at a CAGR of ~6.5%

during the same period.

Source:CSO; RBI D&B Estimates

Interest rate hike, high inflation, higher fiscal deficit and the influence of

external macro factors resulted in sharp decline in GDP to 6.48% in FY

2012 from the level of 8% plus GDP growth witnessed in previous two

fiscal.

The countrys IIP growth figure also reflected a steep fall of over 5

percentage point to 3.2 % in FY 2012 as compared 8.23% registered

during the previous fiscal.

In the midst of current economic slowdown, RBI has cut down Indias

GDP growth forecast to 5.8% for FY 2013 in October 2012 from the

earlier projection of 6.5%.

As seen in below chart, the services sector has registered the maximum

growth over the period FY 2007-12 followed by the industrial sector,

while growth in the agriculture lags far behind.

9.5% 9.3%

6.7%

8.4% 8.4%

6.5%5.8%12.9%

15.5%

2.5%

5.28%

8.23%

3.2%

5%

FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013E

Macro Economic Indicator

GDP Growth Rate IIP Growth Rate




Source: Business Beacon

In FY 2012, services sectors contribution towards GDP stood at 59%,

followed by industry (27%) and agriculture (14%). Also, the share of

services in the GDP of our country is observed to be increasing, while

that of agriculture is seen declining over the period FY 2007-12.

Source: Business Beacon; D&B Research

The annual growth rate of services sector, industry and agriculture

sector declined to 8.91%, 3.38% and 2.76% in FY 2012 as compared

9.35%, 7.16% and 7.03% respectively, registered in previous fiscal.

6,192

6,551 6,557 6,625

7,0917,287

FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Agriculture (INR Bn)

10,21211,200 11,697

12,67913,587 14,047

FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Industry (INR Bn)

19,24021,216

23,33325,772

28,18130,692

FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Services (INR Bn)

3.31%

6.58%

9.79%

Agriculture Industry Services

CAGR (FY 2007-12)

GDP (Factor Cost, Constant 2004-05 Prices) by Economic Activity

17

.4%

28.7

%

54.0

%

16

.8%

28

.7%

54.4

%

15

.8%

28.1

%

56

.1%

14.7

%

28

.1%

57

.2%

14

.5%

27

.8%

57.7

%

14.0

%

27

.0%

59.0

%

Agriculture Industry Services

Contribution towards GDP by Key Economic Activity

FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012




Quarterly Performance

As seen in below graphs, the overall economic activity witnessed a

declining trend in all 4 quarters of FY2012 when compared with

quarterly growth of FY 2011. Only exception to this trend was the 4%

growth registered in agriculture sector in Q1 FY 2012 as against 3%

growth registered in Q1 FY 2011.

Sources: Business Beacon

Sources: Business Beacon

In Q1 FY 2013, Indias Quarterly GDP growth grew by just 5.5% as

compared to 8% GDP growth in the same quarter in previous fiscal.

However, the GDP growth was marginally higher against the 5.3% in

preceding quarter (Q4 FY 2012). Growth in the entire segment declined

in Q1 FY 2013 from the year ago level.

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Q1:FY

2011Q2:FY

2011Q3:FY

2011Q4:FY

2011 Q1:FY

2012Q2:FY

2012Q3:FY

2012Q4:FY

2012Q1: FY

2013

Yearly Q-o-Q change in Sectoral GDP Compositon (%)

GDP Growth Agricuture Industry Service Services

8.5%

7.6%8.2%

9.2%

8.0%

6.7%6.1%

5.3% 5.5%9.6%

6.8%

8.6%7.9%

7.0%

3.2% 1.2%0.4% -0.2%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Q1: FY 2011

Q2: FY 2011

Q3: FY 2011

Q4: FY 2011

Q1: FY 2012

Q2: FY 2012

Q3: FY 2012

Q4: FY 2012

Q1: FY 2013

Yearly Q-o-Q Growth Trend (%)

GDP Growth IIP Growth




In Q1 FY 2013, the GDP growth of agriculture, industry and services

slowed down from 3.7%, 5.6% and 10% to 2.9%, 3.6% and 7%,

respectively. In sequential preceding quarter, the GDP of agriculture,

industry and services grew by 1.7%, 1.9% and 8%. Thus, growth in

services sector slowed to 7% in Q1 FY 2013 from 8% in Q4 FY 2012

whereas GDP of agriculture and industry reported a higher growth in Q1

FY 2013 on sequential q-o-q basis.

In Q1 FY2013, the Index of Industrial Production (IIP) reported a

negative growth of 0.2% on y-o-y basis and of 6.7% decline as

compared to preceding quarter i.e Q4 FY 2012




Interest Rate Risk

Source: RBI, US Treasury, D&B India Research

Domestic interest rates have started firming up in 2010 amid prospects of

economic revival after facing sharp decline in the previous one and half

years.3M MIBOR has reflected an increasing trend since November 2009.

During FY 2012, 3M MIBOR remained in the range of 9.06%-11.06% which

reflects expensive credit availbility to corporate which have either delayed or

stalled the capacity expansion activities and have pull down the overall

economic growth.

In the midst of bleak economic outlook on domestic economy, investor have

become risk averse. This is well captured by the increasing yield on 10Yrs

G-Sec since April 2009. During FY 2012, it remained in the range of 8.10-

8.88%.

The prevailing uncertainty in the global economic environment like crises in

the euro zone, sustained weakness of the US economy, elevated

commodity prices etc. have adversely impacted consumer confidence

across the globe and have potential to substantially lower the consumption

demand, resulting in a slowdown.

As a result, the industry players have been demanding the interest rate cut

to revive the domestic economy which have been witnessing a decline in

GDP growth in last four consecutive quarters of FY 2012 on y-o-y basis.

To curb burgeoning inflation, RBI adopted the monetary policy tightening

since February 2010. RBI kept on increasing the repo and reverse repo rate

which saw last hike of 25 basis points each on 25th

October 2011 to reach

8.5% and 7.5%, respectively. On April 17th 2012, RBI slashed the repo rate

(rate at which RBI lend money to commercial banks) and reverse repo by 50

0%

1%

2%

3%

4%

5%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

Ap

r-09

Jun

-09

Au

g-0

9O

ct-0

9D

ec-

09

Feb

-10

Ap

r-10

Jun

-10

Au

g-1

0O

ct-1

0D

ec-

10

Feb

-11

Ap

r-11

Jun

-11

Au

g-1

1O

ct-1

1D

ec-

11

Feb

-12

Ap

r-12

Jun

-12

Au

g-1

2

International Interest Rate Movement

3M-LIBOR(LHS) 10-Yr US T-Bond (RHS)

4%

5%

6%

7%

8%

9%

10%

0%

3%

6%

9%

12%

15%

Ap

r-09

Jun

-09

Au

g-0

9O

ct-0

9D

ec-

09

Feb

-10

Ap

r-10

Jun

-10

Au

g-1

0O

ct-1

0D

ec-

10

Feb

-11

Ap

r-11

Jun

-11

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g-1

1O

ct-1

1D

ec-

11

Feb

-12

Ap

r-12

Jun

-12

Au

g-1

2

Domestic Interest Rate Movement

3M-MIBOR(LHS) 10-Yr GOI Security Yield (RHS)




basis point for the first time in three years even though the inflation rate

remain elevated in order to boost sluggish economic growth.

Source: Office of the Economic Advisor; RBI

Also, the CRR which kept increasing in phases from 5% to 6%, during

February to April 2010 and remained at same level thereafter was slashed

by 50 basis point to 5.5% on Jan 24, 2012. Since March 2012, CRR has

been reduced thrice (each time by 25 basis point) inorder to infuse the

primary liquidity in banking system and supports the GDP growth. Wiith

recent cut of 25 basis point in 30th October 2012, the CRR currently stands

at 4.25%.

Because of the sustained high inflation, RBI in its Monetary Policy Review in

September 2012, kept the key policy rate unchanged against expectation of

the industry experts who were expecting a rate cut as a measure to prevent

the decelerating economic growth.

4.0%4.5%5.0%5.5%6.0%6.5%7.0%7.5%8.0%8.5%9.0%9.5%10.0%

120.0

125.0

130.0

135.0

140.0

145.0

150.0

155.0

160.0

165.0

170.0

Ap

r-0

9

Jul-

09

Oct

-09

Jan

-10

Ap

r-1

0

Jul-

10

Oct

-10

Jan

-11

Ap

r-1

1

Jul-

11

Oct

-11

Jan

-12

Ap

r-1

2

Jul-

12

Oct

-12

Movement: Inflation, CRR & Repo Rate

WPI (LHS) CRR (RHS) Repo Rate

30th October2012; CRR rate cut to 4.25%

17th April 2012;Repo Rate cut by 50 Basis point

Index (2004-05) = 100




Foreign Exchange Fluctuations

IT infrastructures services is largely an export oriented industry. Indias

IS outsourcing generated exports worth ~INR 335.09 Bn in FY 2012

registering Y-o-Y growth of ~30%.

As most of the exports are billed in US dollars terms, the exchange rate

of USD in ~INR has a significant impact on the industry.

Indian Rupee depreciated from ~INR 45.6/USD (average for the year) in

FY 2011 to ~INR 47.86/USD in FY 2012. In FY 2012, this depreciation

however muted favorable implication on the export realizations as many

of the top players abide by foreign exchange contracts due to which

they enjoyed benefit only to the extent of currency hedging done by

them.

Rupee has been losing ground against USD in YTD of FY 2013 amid

some fluctuation which is expected to bolster the export earnings for the

industry.

Source: Ministry of Finance, Government of India

~INR Touched Lowest against USD at 57.26

on 29th June, 2012

43.5

45.5

47.5

49.5

51.5

53.5

55.5

57.5

01

/Ap

r/1

0

01

/Ju

n/1

0

01

/Au

g/1

0

01

/Oct

/10

01

/De

c/1

0

01

/Feb

/11

01

/Ap

r/1

1

01

/Ju

n/1

1

01

/Au

g/1

1

01

/Oct

/11

01

/De

c/1

1

01

/Feb

/12

01

/Ap

r/1

2

01

/Ju

n/1

2

01

/Au

g/1

2

01

/Oct

/12

Exchange Rate (INR per USD)Inverse Scale

FY'11INR Appreciating

FY'12INR Depreciating

YTD

FY'1

3

INR

De

pre

ciating




GOVERNMENT REGULATIONS

Government Initiatives

The IT industry, which offers IT Infrastructure Services, is gaining

importance in the Indian economy as its contribution to national GDP

has grown from 6.4% in FY 2008 to ~7.5% in FY 2012. Further,

willingness of the Indian government to boost the services sector

enabled the industry to make rapid strides within short time.

In the Union Budget 2012-13, the Central plan outlay to Department of

Information Technology (DIT) was increased to ~INR 53.63 Bn against

~INR 36.19 Bn in previous budget.

~INR 17.29 Bn was allocated for e-Government which includes

investment towards Electronic Governance (~INR 9.75 Bn) and towards

NIC to the tune of ~INR 7.54 Bn.

~INR 5.34 Bn towards e-Learning initiative, which includes investment

towards National Knowledge Network ~INR 3.6 Bn and Manpower

Development including Skill Development in IT ~INR 1.28 Bn.

With this increase allocation the government aim to expand the e-

Development of the country by creating e-Infrastructure, expedite the e-

governance process, accelerating R&D activities, building knowledge

network and securing India's cyber space.

An increase in the weighted tax deduction allowed on in-house R&D

expense from 150% to 200% was extended for five year period up till

2017 in Union Budget 2012-13. This is likely to promote new technology

innovations in the computer hardware segment.

Service tax rate increased from 10% to 12% which will have negligible

impact on the profitability of IT players as they will be able to pass on

this increased cost to the client. Existing surcharge of 5% on domestic

companies and 2% on other than domestic company will continued to

be levied.




DEMAND SUPPLY DYNAMICS

Market Size

Source: Nasscom, D&B Research

Revenue generated by the Indian IT Services industry has increased

increased at a CAGR of 19% (in rupee terms) over the period FY 2008-

12. In rupee terms, the industry increased from ~INR 1,212 Bn in FY

2008 to ~INR 2,413 Bn in FY 2012 while in dollar terms, the industry

increased from ~USD 30.08 Bn to ~USD 52.30 Bn over the same

period, registering a CAGR of 14.8% over the same period.

Economic growth, increasing computerization by Indian industries as

well as e-governance projects has also fuelled demand for IT

Infrastructure Services in the domestic market.

Indian IT industry has been aggressively pursuing opportunities in the IT

Infrastructure Outsourcing market. This is evident from the stunning

CAGR growth of 23% over the period FY 2008-12. Revenues from the

IT Infrastructure Services grew from ~INR 182 Bn to ~INR 410 Bn over

the same period.

The contribution of IT Infrastructure Services to total IT services

revenue has increased from 15% in FY 2008 to 17% in FY 2012.

1,2

12

1,5

62

1,7

24

2,0

25

2,4

13

182

223

273

335

410

50

100

150

200

250

300

350

400

450

0

500

1,000

1,500

2,000

2,500

3,000

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Revenue Trend (INR Bn)

IT Services (LHS) IT Infrastructure Management Services (RHS)




Exports

IT services is the largest segment of IT-BPO industry and accounted for

about 58% in total export earning in FY 2012. India is rapidly emerging

as a preferred destination for outsourcing of IT Infrastructure Services

on account of low cost base as well as increasing technical capabilities

of the Indian IT companies. This has led to increase in share of IS

outsourcing in the total IT Services export earnings.


Export earnings from IS Outsourcing registered an impressive CAGR

growth of 29% (in rupee terms) over the period FY 2008-12, wherein

those from IT services grew at a modest rate of 20% over the same

period. In dollar terms, the revenue increased from USD 3 Bn in FY

2008 to USD 7 Bn by FY 2012, registering a CAGR of 24%.

Source: D&B Research, Nasscom

13.5%14.4%

16.8% 16.9%

18.4%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

19.0%

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Revenue Contribution of IS Outsourcing in IT Services Exports

89

4.5

11

84

.7

12

96

.5

15

26

.9

18

24

.4

120.9

170.3

217.7

258.3

335.1

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

FY 2008 FY 2009 FY 2010 FY 2011 FY 2012

Export Revenue (~INR Bn)

IT Services (LHS) IS Outsourcing Services (RHS)




Banking, Financial Services and Insurance (BFSI) vertical forms the

largest share of exports followed by Telecom forms the third largest

share of exports for IT Services industry.


All these industries are highly consumer oriented and require constant

consumer interaction which results in high usage of IT Services. Indian

companies are also increasingly catering to the pharmaceutical,

healthcare, utilities and transportation industries.

The following chart represents Indias major IT Services export

destinations in FY 2011.

Source: D&B Research, Nasscom STR 2011

BFSI, 41.2%

Telecom, 19.0%

Others (, 39.8%

IT Services: Sector wise Exports (FY 2012)

US, 61.5%UK, 17%

Continental Europe , 11.60%

APAC, 7.50%Rest of the World

, 2%

IT Services : Exports Destination (INR Bn),FY 2011




The US is a major export destination for the Indian IT Services exports,

followed by the Europe.

Both these regions are highly technology dependent and also face high

labor costs, which led them to outsource some of their technology part

to low cost destinations, such as India.

However, India is now trying to lower dependence on these regions and

is increasingly targeting the unexplored territories such as Latin

America, Middle East, Africa and Asia-Pacific.

Indian IT companies have established their presence across these

verticals and geographies with offerings such as Application

Development and Maintenance, Packaged Software Implementation,

BPO etc. With established client base, it is becoming easier for these

companies to offer IT Infrastructure Services as a part of the extended

value chain.




Demand Drivers

The robust growth of IT Infrastructure services has been attributed to

the convergence of Information, Communication & Entertainment.

Increasing usage of technological products has led IT Infrastructure to

become backbone for the global companies. Worldwide, the companies

are preferring computerization as well as automation to streamline their

costs. Hence, many of them are spending huge amounts on IT. This

further created opportunity for the export-oriented Indian IT industry.

Sources: Nasscom

Indias huge talent pool with around 0.5 million engineering graduates

per annum also assures high quality of work to the global clients. The

Indian IT-ITES has grown rapidly on account of its huge talent pool

available at lower costs. An average wage rate for Indian computer

programmer is ~15% of his counterpart in the US. This wage

differentiation can help the companies in developed world to save ~20%

by outsourcing their work to low cost destinations such as India.

Domestic demand also augurs well for the IT Infrastructure Services

providers. Significant IT adoption in sectors like Telecom, BFSI,

Manufacturing verticals, ITeS, Education, Small Office / Home Office

(SOHO), Small & Medium Enterprises, (SMEs), and e-Governance

have been augmenting the need of managed IT Infrastructure services.

Increasing demand for hardware and networking products from the

companies also provides new growth avenues to players in IT

infrastructure services.

1.40

1.54

1.61

1.70

1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

2008 2009 2010 2011

Worldwide IT Spending (~USD Trillion)




Cloud Computing is expected to be a future demand driver for the IT

Infrastructure industry. As the customer pays only rent to access IT

services over internet and does not require investing in the physical

infrastructure, it is creating low cost alternative for huge base of small

sized companies across the globe. Storage facilities on the cloud are

especially gaining importance and have resulted in increasing demand

for data centres.

Government led National eGovernance programme (NeGP) include

implementation of required IT infrastructure to support it mission of

transforming traditional service delivery mechanisms on electronic

platform. Within NeGP, the implementation of required IT infrastructure

includes four broad platform i.e State Wide Area Network (SWAN),

State Data Centre (SDC), National e-Governance Service Delivery

Gateway (NSDG) and State Service Delivery Gateway (SSDG).

Also, the ambitious Unique Identification (UID) project worth ~INR 32 Bn

for Phase-I and Phase-II over the five year period FY 2010-14 creates

vast opportunities for IT Infrastructure Services providers.

countrys infrastructure backbone especially telecom and its increased

reliability, availability of low-cost, high speed bandwidth




Projections


Increasing global demand for Remote Infrastructure Management (RIM)

or offshoring of IT Infrastructure Services on the back of increasing

ownership cost is expected to fuel growth of the Indian IT industry.

The increasing government and private sector spending on technology

is expected to drive the domestic IT Infrastructure revenues to grow at a

CAGR of 23% over the period FY 2012-15.

Going forward, industry sources also suggest that revenue from RIM

services will account for about 1/3 share of the total IT services

segment revenue by 2020.

410.3

500.5

620.7

775.8

FY 2012 FY 2013P FY 2014P FY 2015P

Projection: IT Infrastructure Services (~INR BN)




COMPETITIVE SCENARIO

Nature of Industry

The growing requirement of managed IT infrastructure services has

resulted into many IT players expanding their services offering to

include various infrastructure services.

With increased maturity, key IT companies like TCS, HCL, Wipro,

Infosys now offers end-to-end infrastructure services.

Indian IT-ITeS industry is dominated by Tata Consultancy Services

which corners 8.4 % of the market share. Wipro ranks at the second

place with a share of 6.8% closely followed by Infosys with a market

share of 6.7%.

Source: D&B Research. *Note: Based On Net Sales

The annual growth in top line and bottom line financial of the key

players are as follow:

Companies Net Sales * (~INR Bn) PAT* (~INR Bn)

FY 2011 FY 2012 % Y-o-Y FY 2011 FY 2012 % Y-o-Y

TCS Ltd. 292.34 388.00 32.7% 75.70 109.76 45.0%

Wipro Ltd. 262.63 316.19 20.4% 48.44 46.85 -3.3%

Infosys Ltd. 253.37 312.03 23.2% 64.43 84.70 31.5%

*Notes Standalone financial are considered Source: CMIE,

Despite the challenging macroeconomic environment, the top three

players reported a healthy growth in net sales in FY 2012 as compared

TCS Ltd., 8.4% Wipro Ltd., 6.8%

Infosys Ltd., 6.7%

Others , 78.1%

Market Share: Indian IT -ITeS Industry (FY 2012)




to FY 2011. Both TCS Ltd. and Infosys Ltd reported a robust growth in

net profit whereas Wipro Ltd. reported a negative growth in net profit.

TCS Ltd., Indias largest IT Company posted an increase 32.7% in net

sales in FY 2012 as compared to 27% increase in previous fiscal.

Various factors such as double digit growth across diversified verticals

and geography, balanced business portfolio, product innovation,

customer centric approach, timely execution of projects, focus on

pricing, helped in achieving a robust growth in net sales and maintaining

the margins in FY 2012.

Wipro though report a healthy growth in net sales however it net profit

declined marginally because of the losses to the tune of ~INR 2.787 Mn

in FY 2012 as against gain of ~INR 326 Mn in FY 2011 due to the

changes in the fair value of forward exchange contract.

Major international companies having presence in the IT Infrastructure

Services arena include HP, Fujitsu, IBM, Cognizant, Accenture,

Capgemeni, CISCO, CSC etc.

Key Trend

Domestic IT companies have grown on account of low cost base which

helped them to win big outsourcing deals. However, as major foreign

players have made India as base, they also enjoy the advantage of low

costs. Hence, the major advantage of domestic companies to offshore

work to India is expected to diminish in future.

Indian companies are also expected to face competition from emerging

outsourcing destinations such as Philippines, Poland, Hungary,

Romania etc.

All these factors are leading Indian companies to focus on the

increasing domestic demand. Most of these companies intend to

increase their domestic revenue share. However, even in domestic

market, competition is intense as global industry majors have already

forayed into it.

Indian companies are increasingly looking for global delivery model.

They are setting up development centers in Latin America, South East

Asia and Eastern European countries to take advantage of low cost and

also cater the local market.




Globally, distinction between pure play software and hardware players

is also reducing. This phenomenon is leading many Indian companies

to venture into IT Infrastructure Services in order to increase their

overall appeal.

Application Development and Maintenance services which used to

provide major chunk of revenues to the domestic IT players, are getting

affected due to the falling billing rates. Hence, the companies are now

venturing into new high value services such as IT Consulting,

Infrastructure Management, Product Development, and end-to-end

turnkey solutions.

Large IT players are increasingly adopting inorganic growth route like

strategic acquisition, mergers, joint venture etc. to expand their

business portfolio. For eg, TCS recently acquired CRL which is a

pioneering startup company in High Performance Computing (HPC)

solutions. This will strengthen TCS capabilities in the arena of

Infrastructure Management, Engineering and Industrial Services. This

will also enable TCS capability to establish cloud based industry

platform.




Recent IS Outsourcing Contract

Indian companies are also bagging major outsourcing deals which will

help them to increase revenues from IT Infrastructure Services. Some

of the recent contracts signed by the Indian players are as:

Month Company Client Brief Details

October 2012 IBM Kwality Dairy India

Cloud Service Contract

IBM SmartCloud SAP Express Dairy Solution, in one of the first such deployments in the Indian dairy industry

October 2012 Netmagic Solutions

Ratnakar Bank

5 year contract for IT infrastructure hosting, managed services, and security services

September 2019

HCL Freescale Semiconductor to

5 year IT Infrastructure contract worth $60-80Mn deal as per industry sources

September 2012

Infosys Ltd Ministry Of Corporate Affair (MCA)

To execute second phase of the ministrys e-governance programme- MCA21-

To start in Jan 2013-July 2021,

Deal worth ~INR 3.59 Bn

Feburary 2012

Mahindra Satyam

FuelQuest

To provide implementation and support services to Fuel Quest. Fuel Quest is a technology solution provider to energy sector and is expanding its operation in BRIC region.

June 2011 IBM India Info Line 10 year deal worth ~INR 2.98 Bn for managed IT services.





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India's IT Infrastructure Services

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