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India Equity Research Reports, IPO and Stock News
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Computer Services and IT
Consulting
Takeaways from Our India Trip - A Long Runway for
Offshore Growth
We recently returned from India where we met with 18 offshore IT and BPO services
participants. We came away from the trip believing demand for offshore ITS/BPO
remains strong, and likely has a long runway driven by a significant adoption by new
verticals/regions and offshoring of new services. However, the sector’s premium
valuation reflects high expectations (and risks), and we prefer stocks where we have
the most confidence in continued industry leading and high growth. We prefer CTSH
and TCS for these reasons, and also highlight ACN for its customer relationships and
best in class globally diversified business. We also view SYNT as our top small/mid
cap idea.
• Strong demand trend, with a long runway. We expect clients from newer
verticals/regions will increasingly look to offshore their IT and BPO operations, and
offshore firms will provide newer set of services. Near term, offshore demand
environment is likely strong with a potential of industry wide CY11 growth similar
(or potentially better in some case) to CY10’s (22% for IT services, according to
NASSCOM), although initial guidance of various firms will likely be lower. We
believe regulatory spending will be a net positive, a “refresh” cycle in clients’ IT
organization, and new technology trends will drive growth in CY11. We do not
expect significant growth headwinds in CY11 from pent up spending of CY10. We
heard demand remains strong in the financial services vertical, while healthcare,
manufacturing, and retail verticals will likely grow at above average rates.
• Supply should not constrain growth. We estimate the Indian education system
will generate enough technical and non-technical labor to meet the industry’s
demand. We calculate an industry-wide supply of 800k “industry-ready” engineers
over the next four years, compared to a demand of 600k people. Similarly, the
supply of non-technical labor (we estimate 1.3M) should also exceed demand of
400k people. We also expect a mid-to-high single digit increase in revenue per
employee for the industry over the next 4 years. We also believe wage inflation will
likely remain in double digits, but its margin impact is generally overemphasized
(we estimate ~130bps impact on CTSH from 15% wage inflation).
• Losing investment focus? We observed a higher focus on expanding/preserving
margins among many Indian firms (except CTSH), compared to the last year. We
believe there is a risk margin focus could come in at an expense of business
investments, specifically given that most firms are experiencing strong demand for
core services, which could reduce incentives to invest in new and emerging areas.
We believe these investments, although near term margin dilutive, are important and
could separate long term winners from losers in the offshore space. We believe ACN
is best positioned in terms of investing for diversified growth while CTSH’s aheadof-
the-curve investments in the offshore space should enable it to maintain its
growth leadership.
• Pure play BPO facing challenges. Outsourcing of BPO processes require much higher
due-diligence from clients with little or no payback in the first year. We believe high
initial costs could make many potential clients a bit reluctant to take the outsourcing
decision. Moreover, we view pure play BPO firms facing increasing competition from
IT services firms that can offer integrated ITS/BPO to their clients.
• Cloud. We believe cloud will be a net positive for offshore firms although it is unlikely
to move the needle for most firms (may be, except for TCS) over the near term. Indian
firms, in our view, will collaborate with other technology vendors (hardware/software
vendors), and will offer cloud based services. We did not see much interest for offering
and investing in SaaS solutions, but many firms will also likely offer advisory and
integration/implementation services around cloud migration.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Computer Services and IT
Consulting
Takeaways from Our India Trip - A Long Runway for
Offshore Growth
We recently returned from India where we met with 18 offshore IT and BPO services
participants. We came away from the trip believing demand for offshore ITS/BPO
remains strong, and likely has a long runway driven by a significant adoption by new
verticals/regions and offshoring of new services. However, the sector’s premium
valuation reflects high expectations (and risks), and we prefer stocks where we have
the most confidence in continued industry leading and high growth. We prefer CTSH
and TCS for these reasons, and also highlight ACN for its customer relationships and
best in class globally diversified business. We also view SYNT as our top small/mid
cap idea.
• Strong demand trend, with a long runway. We expect clients from newer
verticals/regions will increasingly look to offshore their IT and BPO operations, and
offshore firms will provide newer set of services. Near term, offshore demand
environment is likely strong with a potential of industry wide CY11 growth similar
(or potentially better in some case) to CY10’s (22% for IT services, according to
NASSCOM), although initial guidance of various firms will likely be lower. We
believe regulatory spending will be a net positive, a “refresh” cycle in clients’ IT
organization, and new technology trends will drive growth in CY11. We do not
expect significant growth headwinds in CY11 from pent up spending of CY10. We
heard demand remains strong in the financial services vertical, while healthcare,
manufacturing, and retail verticals will likely grow at above average rates.
• Supply should not constrain growth. We estimate the Indian education system
will generate enough technical and non-technical labor to meet the industry’s
demand. We calculate an industry-wide supply of 800k “industry-ready” engineers
over the next four years, compared to a demand of 600k people. Similarly, the
supply of non-technical labor (we estimate 1.3M) should also exceed demand of
400k people. We also expect a mid-to-high single digit increase in revenue per
employee for the industry over the next 4 years. We also believe wage inflation will
likely remain in double digits, but its margin impact is generally overemphasized
(we estimate ~130bps impact on CTSH from 15% wage inflation).
• Losing investment focus? We observed a higher focus on expanding/preserving
margins among many Indian firms (except CTSH), compared to the last year. We
believe there is a risk margin focus could come in at an expense of business
investments, specifically given that most firms are experiencing strong demand for
core services, which could reduce incentives to invest in new and emerging areas.
We believe these investments, although near term margin dilutive, are important and
could separate long term winners from losers in the offshore space. We believe ACN
is best positioned in terms of investing for diversified growth while CTSH’s aheadof-
the-curve investments in the offshore space should enable it to maintain its
growth leadership.
• Pure play BPO facing challenges. Outsourcing of BPO processes require much higher
due-diligence from clients with little or no payback in the first year. We believe high
initial costs could make many potential clients a bit reluctant to take the outsourcing
decision. Moreover, we view pure play BPO firms facing increasing competition from
IT services firms that can offer integrated ITS/BPO to their clients.
• Cloud. We believe cloud will be a net positive for offshore firms although it is unlikely
to move the needle for most firms (may be, except for TCS) over the near term. Indian
firms, in our view, will collaborate with other technology vendors (hardware/software
vendors), and will offer cloud based services. We did not see much interest for offering
and investing in SaaS solutions, but many firms will also likely offer advisory and
integration/implementation services around cloud migration.
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