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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 ex pandi ng clien t base and innov ative pr oduct launches. Additio nally, newer vertic als 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. ht tps://ww w.crisilresear ch.com /Cut ting Edge/indu stry.jspx?serviceId=... 1 of 6 8/23/2011 2:57 PM
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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.

Disclaimer:

Industry Information Service is a Product of CRISIL Research, a Division of CRISIL Limited. CRISIL Research has taken due careand caution in developing this Product based on the information in the public domain, but its adequacy or accuracy or completeness

is not guaranteed. CRISIL Research operates independently of, and does not have access to information obtained by CRISIL'sRatings Division, which may in its regular course of operations obtain information that is confidential in nature. The views of 

CRISIL Research expressed herein cannot be compared with the rating assigned or outlook developed on the companies in the same

Industry by the Ratings Division or any other Division or subsidiary of CRISIL Limited. CRISIL Research is not responsible for anyerrors or omissions in the analysis/inferences/views or for the results obtained from the use of the Product. CRISIL Limited has no

financial liability whatsoever to the subscribers/users/transmitters/distributors of this Product. This Product is for the information of 

the subscriber only and no part of this Product may be published/reproduced in any form without prior written permission of CRISILResearch.

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