India’s potentially vast IT market has a number of fundamental growth drivers. The second half of 2009 saw a modest recovery in spending on computers after a contraction in H109 as the country was buffeted by strong economic headwinds. Stronger growth in enterprise spending is expected in 2010, after the 2009 recovery was driven mainly by consumer notebook purchases.
The total size of the IT market is now projected to increase from US$14.7bn in 2010 to US$26.6bn by 2014. IT spending growth slowed significantly in H109, which brought a double-digit shipment decline in PC sales, but a recovery was expected to begin in the second half of the year, with a strong festive season. Government procurement should also grow robustly in 2010, along with opportunities in healthcare, education, telecoms and financial services.
The long-term potential of India’s IT market is plain: less than 3% of people in India own a computer (about one-fifth of the level in China), meaning particular potential in the lower-end product range. However, realisation of this long-term growth potential depends on fundamental drivers such as raising India’s low computer penetration, rising incomes, falling computer prices and the government’s ambitions to connect the vast rural areas to the outside world.
The government’s five-year e-government plan, unveiled in 2006, was assigned a nominal budget of INR23,000 crore through 2011. The budget covered 26 core projects including agriculture, income tax, pensions, land records and passports. However, as of the end of 2009, many of these projects had yet to be awarded, or even tendered.
A key driver of informatisation in the government sector is likely to be the e-ID card programme, which took a step forward in June 2009 when the government announced a new head for the Unique Identity Authority of India. After repeated delays, the project is still at a very early stage. However, it has been estimated that the total cost of the project could be at least INR1.5bn lakh crore. The project received a boost in January when a court suggested that national ID cards should be made mandatory for all citizens.
Faced with a sharp slowdown in global and domestic computer sales, the Indian government announced a series of measures in 2009 to support the market. Service tax was cut from 12% to 10% and excise duty from 10% to 8%.The measures were intended to provide relief to domestic consumers, while also providing some support to IT exporters. However, there were questions about how much effect the measures would have on both scores.
Competitive Landscape Major PC vendors have rolled out a series of new models installed with Microsoft’s Windows 7 operating system and in Q409 Microsoft said that it had co-operated with 100 original equipment manufacturers (OEMs) in India to achieve a target of having Windows 7 installed on more than 100 computer models. Microsoft reported that in the first month following the new operating system launch in October 2009, more than 2,000 Indian companies started an upgrade process.
In H209, leading Indian market PC vendors including Asus, HCL and Dell were also pursuing tie-ups with telecoms companies to bundle mobile data packages with their netbooks. Dell reached an agreement with MTNL to offer Dell’s Inspiron Mini 10 netbook with MTNL’s 3G wireless mobility solution. Meanwhile, Dell and Asus have announced similar tie-ups with Reliance, which will offer wireless broadband to purchasers of their netbooks. HCL said that it was also in talks with leading telecoms companies. These three vendors planned to launch new models in Q409, following the official release of Microsoft’s new operating system.
Meanwhile, IBM embarked on a new strategy of moving beyond India’s leading city markets to focus on expansion in tier-two and tier-three cities. The company has announced its first partnerships with two companies in Uttar Pradesh, which will offer a wide range of solutions and consulting services to clients. IBM has launched an overhaul of its Indian channel structure, planning to move from an open to a closed distribution model from October 1 2009.
We now estimate that the Indian addressable market for PCs (including notebooks and accessories) will be worth around US$6.2bn in 2010, up from US$5.6bn in 2009. New product releases and procurements deferred from earlier in the year enabled computer revenues to record double-digt quarterly growth in Q309, but revenues were still down by around 3% year-on-year (y-o-y). Shipments were down by a double-digit factor in both Q1 and Q2 as consumers and businesses retrenched, but weexpected growth to pick up in the fourth quarter of 2009.
One factor that has affected the Indian computer market during the current economic slowdown has been weaker-than-expected demand for netbooks. However, we predict that the market will grow at a compound annual growth rate (CAGR) of 15% between 2010 and 2014, with unit sales resuming strong growth. Despite the economic headwinds of 2009, the market has a number of potential strong growth drivers – only nine out of 1,000 people in India own a computer, one-fifth of the level in China.
The Indian software market should continue to grow, with software spending CAGR for 2010-2014 projected at 15%. In terms of sectors, the most obvious growth opportunities are in the public sector and among small and medium-sized enterprises (SMEs). Despite current economic headwinds, the local market is likely to sustain vendor investment, with small and medium firms becoming more sophisticated in their demand for customised software and applications to increase business flexibility. In recent years, the SME market in India for hardware deployment has grown and this has resulted in an increasing opportunity for applications. More demand for solutions and hardware now comes from second- and third-tier cities. Industry reforms and privatisations, government regulations and new global competition have encouraged SMEs to use more technology. Recently, there has been an increased enthusiasm for hosted applications and software as a service (SaaS), which improved telecoms infrastructure makes more feasible.
India’s IT services market is estimated at around US$5.4bn in 2010 and is projected to grow to US$10.4bn in 2014. The Indian market has traditionally been low margin, with India’s IT majors such as Infosys, Wipro and TCS focusing most of their attention outside the domestic market. Particularly with the US and global economic downturn, however, vendors are now more attuned to the growing size of the Indian IT services market opportunity.
Over the next one to two years, vendors are expected to compete for a share of significant spending on major public sector IT projects such as ID cards, e-government and railway modernisation. There is an increasing number of large projects, particularly from the government, but also from key verticals such as banks, telecoms, defence, manufacturing and retail.
Broadband subscriber numbers have consistently fallen behind target in India. The main reason for the slow uptake is thought to be insufficient demand, although the government has taken some measures to reduce tariffs and encourage alternative forms of service provision. One brake on PC penetration is a poor dial-up internet home-user experience, even in cities. If this is to change, the government must take the initiative in improving bandwidth availability. Government plans to encourage WiMAX network deployment may have some impact on penetration.
Key Issues For Investors Despite a cheap and well educated workforce, India’s business environment is impeded by excessive government regulation. Foreign equity holdings remain restricted in many sectors. Hiring and firing procedures, meanwhile, are governed by rigid labour laws, under the terms of which companies employing more than 100 people need the permission of the local chief minister to lay off workers. Other concerns include the 670-odd industries reserved for small-scale producers; high import tariffs levied on foreign-made goods; failing infrastructure and, above all, poor power supplies; and a corrupt bureaucracy needed to approve ‘permits’ for even the most routine tasks. India is now fast-tracking the creation of South East Asian-style ‘special economic zones’ aimed at tackling some of these bottlenecks.