Indian IT Software and Services – FY10 Performance and Future Trends

New Delhi, 4th February 2010

What we need to cover today

• Industry Performance – Snapshot of FY10

• FY11 Outlook

• NASSCOM Focus Areas for 2010

We entered 2009 amidst speculation and uncertainty

• How will the Indian IT-BPO industry weather the storm?

• How will the industry remain competitive in this scenario?

• What will happen to our core markets?

• What would be the new areas for growth?

However, Industry exhibits strength due to strong fundamentals and ability to re-engineer

Indian IT-BPO sector-Export * revenues (USD billion)

25.8 27.3

11.712.4

9.610.0

FY09 FY10E

IT Services BPO S/W prod and Engg

47.1

49.75.5%

Source: NASSCOM Strategic Review 2010* Excluding Hardware

•India continues to take centre stage in – 51% of total sourcing market

• Industry accounts for 25% of India’s exports; 10.5% of services revenues

• Over 900 captives in India accounting for USD 10.6 billion; 650+ are Engineering design

•Engineering design services and Product Development clocking USD 10 billion

•Transformation, new business models, driving organization wide efficiencies

Domestic Market is at an inflection point-healthy growth of 12% in FY10

378423

89

108123

131

FY09 FY10E

IT Services BPO S/W products

590

662

12%

Indian IT-BPO Domestic revenues* (INR billion)

Source: NASSCOM Strategic Review 2010* Excluding Hardware

•60+ Large transformational deals in telecom, Retail, BFSI, e-governance

•BPO continues to be the fastest growing segment at 22%

•IT services to grow by 12%•Government IT spend estimated at INR 150 billion in 2009

•USD 9 billion business opportunity in e-Governance over next 3 years

The Industry added 90,000 jobs in FY10

• Industry directly employs nearly 2.3 mn professionals

• Greater efficiencies at play – 4% employee growth for 5.5% revenue growth in exports and 12% in domestic

• 70%+ workforce within 18-30 yrs• Rapidly expanding into Tier 2 / Tier

3 cities – currently operating out of 45+ locations

• 58% employee workforce originating from tier 2/3 cities

Source: NASSCOM Strategic Review 2010

958 993

738 768

500 525

FY09 FY10E

IT Services exports BPO exports

IT-BPO Domestic

2,200 2,290

Direct Employment (‘000), FY09-FY10

4%

Core themes for FY10 – Diversification across new verticals/geographies, service lines, global delivery platform…

New service lines

New markets

New verticals

Global Delivery Centers

4.78.3

FY2007 FY2010E

Retail+Healthcare+Utilities

CAGR:21.3%

USD Bn

1.64.3

FY2007 FY2010ERIM

CAGR:39%

2.74.7

FY2007 FY2010E

Asia Pacific & RoW

CAGR:20.3%

USD Bn

340 450

FY2007 FY2009Global Delivery Centers

CAGR:15%

No. of centers

USD Bn

Source: NASSCOM Strategic Review 2010RIM: Remote Infrastructure Management

…Achieving greater efficiencies and flexibility to retain competitiveness and value creation…

48.4%

45.3% 44.9%

15.0% 12.9% 11.8%

Average utilization rates, Dec07-Dec09

Onsite as a % of total revenues, Dec07- Dec09

Attrition Rates, Dec07- Dec09

20.3%18.7%

17.4%

SG&A, Dec07-Dec09

Shift of onsite personnel to offshore -Reengineering delivery models, reduce costs

SG&A expenses reduced by 3%

Source: Annual reports/Quarterly reports; NASSCOM Strategic Review 2010Data for companies comprising 40% of industry revenues

Dec 07 Dec 08 Dec 09 Dec 07 Dec 08 Dec 09

Attrition levels down by 3%- lower recruitment and training costs

Utilization rates up by 6%- increased use of existing bench strength

Dec 07 Dec 08 Dec 09

INDICATIVE

68.7%

70.8% 74.2%

Dec-07 Dec-08 Dec-09

…Transforming the way we operate and way we impact client’s business

• Investing in sales teams to target new markets

• New pricing models

• Building strong understanding of client domains; vertical and process specific business knowledge

• Investing in in-house training centres/research labs; Reinvestment in IP creation

• Leveraging alternative talent streams/locations to provide low cost products/services

• Leveraging disruptive technologies -“Everything as a Service” delivery model; Platform solutions

•Risk sharing with the service provider

•Moving from Capex to Opexmode

•Access to service delivery excellence through platform and cloud solutions

•Market facing innovation for emerging markets from R&D centers in India

•Reengineered processes optimizing operations

Customer ImpactIndustry measures

Source: IDC

Going forward, rebound expected in Worldwide IT – BPO spend

Worldwide IT spending Growth (%)

5.1%

3.3%

-3.3%

3.1%

5.5%5.6%

2007 2008 2009 2010 2011 2012

December 2009 Forecast

12.5%

7.3%

2.4%

5.9%7.0% 7.4%

2007 2008 2009 2010 2011 2012

December 2009 Forecast

Worldwide BPO spending Growth (%)

IT indices, contracted in 2009, showing signs of stabilization, and even some modest, early signs of recovery in latter part of 2009; Positive 2010 forecasts

FY11 Outlook: Software and services export revenues to grow by 13-15%...Indian IT-BPO sector-Export revenues* (USD billion)

FY09 FY10E FY11P

Growth of 13-15%

• FY11 software and services growth forecast 13-15% (USD)

• Core markets back to previous levels; tremendous headroom for growth in core and emerging markets

• Globalization driving global sourcing models to remain competitive and leverage global talent, capital pools

• Offerings around cloud computing, SaaS, platforms - address new customer segments

• RIM and BPO – growth drivers

* Excluding HardwareSource: NASSCOM Strategic Review 2010

47.149.7

56-57

FY11 Outlook: Software and services domestic revenues to grow by 15-17%...Indian IT-BPO sector-Domestic revenues* (Rs billion)

590662

761-775

FY09 FY10E FY11P

Growth of 15-17%•FY11 software and services growth forecast 15-17% (INR)

•Fastest growing market in the APAC region in terms of IT spending

•Greater IT adoption in retail, healthcare, telecom, BFSI

•SaaS based solutions for the untapped Indian SMB segment (IT spend at over INR 300 billion in 2009)

* Excluding HardwareSource: NASSCOM Strategic Review 2010

However, the industry has been challenged on multiple fronts

• Issues of Protectionism and Visas

• Cost competitiveness, currency fluctuations, inflation

• Increasing Geo-political risk

• Business environment concerns – bandhs, taxation (service tax, transfer pricing)

Concerted effort required by all stakeholders – Industry, NASSCOM, Government

• Targeting new growth engines - enhance and grow opportunities in the domestic market, penetrate new geographies and verticals

• Collaborate with the government to drive Inclusive Growth Agenda through ICT solutions

• Engaging with international governments to address protectionist sentiments

• Enabling policy framework for simplification of regulatory and legal regime

• Nurturing India’s demographic dividend by building capacity and enhance employability

• Positioning and differentiating “India” as a strategic hub for service delivery

Key Focus Areas for NASSCOM in 2010

To Summarize – Sustaining growth with positive outlook

15

• The economic environment will take another 2 to 3 quarters to stabilize

• Timing and strength of the recovery varies across regions, with Asia leading the way, the US following and Europe lagging behind

• Crisis viewed as an opportunity - Industry still growing strongly due to strong fundamentals and its ability to reengineer

• Past 18 months spent on becoming leaner and productive - efficiencies gained would not be lost!

• Growth in global outsourcing enabler for cost efficiencies

• Industry will be net hirer, continue to create employment opportunities