Indian IT - Banking software -Land of Opportunity:: Macquarie

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Indian IT - Banking software
Land of Opportunity
Company visits inspire confidence in product story
􀂃 Indian companies have proven their mettle in the IT services arena. We met
with company managements/vertical heads of six leading banking product
companies to understand the business dynamics behind product business,
outlook for the Indian players and how do they see the story unfold.


Domestic market a key driver of growth
􀂃 US$3.7bn+ opportunity by FY13. Indian IT products industry is estimated to
be worth US$1.6bn in 2010 based on our analysis. Industry organization
NASSCOM forecasts an exponential increase in the size of Indian software
product industry to US$10bn by FY15. Based on our conversations with
industry experts we conservatively expect the industry to be a US$3.7bn
opportunity that is up for grabs by FY13. This would a meaningful 2x jump in
India’s share, to 1% in FY13 from 0.5% in FY10 in the global package
software spend (See Fig 3).

􀂃 Domestic growth outpacing export revenues. We estimate domestic
revenues to grow at a CAGR of 35% from 2010 to 2013E higher than the 30%
growth in export market expected over the same period. The higher growth
rate in the domestic market can be attributed to:
⇒ Faster rate of adoption: This can be attributed to the absence of legacy
systems, which allow Indian clients to take a technological jump to the
latest products.
⇒ Ready to experiment with new pricing models: Indian clients are
embracing product pricing models like pay per use or transaction based
pricing instead of the traditional licensing model.

Tier 1 well entrenched to reap the benefits
􀂃 Winners – Infosys, TCS and OFSS. New software license sales cycle should
spur faster growth for Indian product companies after the relatively slower
growth rates witnessed in last two years. Infosys, TCS and OFSS enjoy scale
benefit, pedigree, brand name and early mover advantage. For Infosys and
TCS product legacy helps them develop deep domain knowledge and
expertise in the vertical.

􀂃 Indian vendors screen favourably on Gartner’s Magic Quadrant. The
latest Magic Quadrant ranking for Retail Core Banking products by Gartner in
Sep. ‘10 ranked Infosys, TCS, OFSS and Polaris in the ‘Leader’ quadrant.
This places them on same footing as global giants on “ability to execute” and
“completeness of vision” (See Fig 14).

Keep value bias to pick niche players
􀂃 Market large enough for smaller players to chip at. Nature of the products
business favours established players with extensive experience and a
credible track record. Even so, product innovation by smaller players creates
opportunity for them to address niche markets. Amongst the three smaller
players we met, Polaris has the strongest product portfolio. It trades at 7x
FY11 PER based on Bloomberg estimates.