Excerpts from Gilford Securities analyst Ashish R. Thadhani's recent note to clients summarizing a recent analyst briefing by NASSCOM President Som Mittal at the Harvard Club in New York on July 28, 2008:
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- Diversification strategies are working well.
- Value proposition is sustainable.
- Operating efficiencies should have a lasting impact.
- Political stability could pave the way for big- ticket reforms.
- 43 Tier-II/III cities have been identified along with state government engagement.
Current uncertainties comprise 1) economic – oil, food and financial markets; 2) elections – in the U.S. and India; and 3) constraints – in the form of talent and infrastructure.
The domestic IT story remains strong given recent economic growth, internet connectivity, technology adoption, automation, etc.
Increased focus on cost and productivity in a recessionary environment is fueling demand for offshore services. Offshoring companies continue to be cushioned by a recurring revenue model, deepening client penetration, focus on critical/sustenance work and a proven value proposition.
Indian IT+BPO export breakdown by region: U.S. 61% of total with 30% compound growth in fiscal 2004-07; U.K. 18% and 43%; Continental Europe 12% and >55%; and Others 8% and 36%. By vertical: Financial Services 40%; Technology & Telecom 19%; Manufacturing 15%; Retail 8%; and Others 18%.
IT contributes 25% of all exports. Separately, Indian IT companies have opened offices in 77 overseas locations!
Of late, offshoring companies are –
- Focusing on productivity and efficiency.
- Benefiting from lowered wage expectations (up 9-11% YoY) and reduced lateral hiring.
- Expanding into Tier-II/III cities that offer 15-20% cost savings. Employment across the five major IT centers (Bangalore, NCR, Mumbai/Pune, Chennai and Hyderabad) should decline from 91% of the total in 2008 to 60% in 2018. Stated differently, employment is forecast to grow at a compound rate of 10% at existing hubs vs. 34% across Tier-II/III locations. Total IT sector employment is projected to reach 8.1 million in 2018, up from 2.0 million in 2008.
The industry has a comprehensive plan for making India’s large talent base “employable.” Initiatives to strengthen the long-term cost advantage encompass –
- Training, on which the top-five companies spend $500 million annually.
- Specialist finishing schools and other programs, e.g., recent Genpact-NIIT announcement.
- Improving faculty quality and compensation. Gilford Securities, Inc. 2
- Increasing overall education capacity.
On the basis of loaded cost per employee, India enjoyed a 72% cost advantage over the U.S. in 2007. Using 3% cost inflation in the U.S. and 10-20% in India, this advantage would only diminish to 53-67% by 2015.
Recent political realignments in India present an opportunity for the government to accelerate the pace of reforms. These include stepped-up spending on education programs. Across political parties, the overall economic agenda remains remarkably similar.
On the subject of U.S. politics, NASSCOM noted –
- It has held meetings with campaign managers of both Presidential candidates.
- Offshoring is now an accepted component of the global business model.
- The U.S. technology sector has gone from facing job losses to experiencing shortages.
- Support from client associations, as well as Indo-U.S. trade relations, are better today than in the past.
Finally, Indian IT companies should not be viewed as soft targets for terrorist activity.
I, Ashish Thadhani, certify that the views expressed in this research report accurately reflect my personal views of the subject companies. I have not and will not receive compensation with respect to the issuance of this report. In the normal course of business, Gilford Securities seeks to perform investment banking and other services for various companies and to receive compensation in connection with such services. As such, Gilford Securities intends to seek compensation for investment banking services from the subject companies in the next three months.