'For those who doubt India can continue its torrid growth pace, you’re not going to be happy with the news coming of Mumbai. The Indian government’s Central Statistical Organization reported last week that the country’s economy is expected to grow 9.2% in 2006–07. The forecast is up from 8.1% and is the fastest growth in 18 years.Better than news of an even stronger national economy is the red-hot forecast for the IT and business process outsourcing (BPO) sector. There, for the fiscal year ending March 31, NASSCOM expects revenue to reach $47.8B, up 28% over the previous period. Total employment is expected to reach 1.63 million people. The industry’s goal is to reach $60B by 2010.
To put this in perspective, consider that the market has more than tripled since FY03 when revenue reached $16.1B. Since FY98, the industry has gone from 1.2% of India’s Gross Domestic Product (GDP) to 5.4%.
IT software and services exports account for $31.3B of the total. This slice is growing at 32.6%. If the market share data trend for FY06 continues, the United States should be about two-thirds of the total market, followed by the UK at 15%. Based on the FY06 data, Germany accounted for 2.4% and the Netherlands for 2% of the total market. China only made up 0.1% of the pie, slightly below Korea 0.2% and equal to Italy.
While IT engineering services and BPO are the tiniest slice at $1.2B, they are expected to grow 30%. Ironically, India’s domestic market had previously been served by multinational companies. According to NASSCOM, the Indian firms are steadily gaining ground.
In the quarter ending December 31, Tata Consultancy Services (TCS) reported 3Q revenue of $1.1B, up 40.7%. TCS is the first to reach the $3B mark in three quarters, with another quarter left to top $4B for the year. Infosys’ 3Q07 revenue was $821M, up 46.9%, while Wipro reported that total 3Q revenue were up 43% to $899M, with global IT services and products up 35% to $640.5M. For 2Q07 (ending December 31), HCL Technologies reported revenue rose 41% to $331.M. Just before the show started, Cognizant announced its 4Q and FY07 earnings this week. Revenue for the quarter came in at $424.4M, up 65%.
The growth of the largest vendors has spawned a whole wave of companies with plans for an IPO and to reach the $1B revenue plateau.
Tracking deal size, number of new customers, and the impact that the top 10 customers have on revenue it its surprising how fast the Indian firms grow on a relatively small base of new customers. Take TCS. In the most recent quarter, it added 55 new customers. In terms of deal size, the company had five over $50M, including two over $100M. That makes 15 $50M+ deals in the last 12 months. In the quarter, the top customer accounted for 5.7% of revenue, the top five were 17.4%, and the top 10 were 27.5%.
Infosys added 43 new customers during the same period. The top account generated 6.9% of revenue, the top five were 18.9%, and the top 10 were 31%.
For Patni Computer Systems, sixth on NASSCOM’s list of largest vendors, revenue for 4Q ending December 31 was $154.3M. The company added 22 new accounts in the quarter. The top customer represented 13.5% of revenue, while the top five and top 10 were 38% and 52.2%, respectively.
Many of these deals are long term—7 to10 years. The future years add a nice revenue stream, which is complemented by existing and add-on business with active customers.
Three quarters of the Fortune 500 and about half of the Global 2000 are now contracting with Indian firms for IT software and services. While some will immediately surmise that the high-end market is saturated, it doesn’t appear to be true. There is a lot of growth inside those accounts, even if it means replacing one of the other firms serving the same account. Plus there are so many additional BPO and services opportunities still out there.
Some downsides to spoil the rosy outlook are: poor infrastructure, employee attrition issues, annual cost increases to offset higher labor charges.'
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