Hit by an appreciating rupee and rising wage costs most Indian software companies came out with results that disappointed investors and analysts alike. With the twin factors eating into their profit margins, a host of these tech firms are now turning to the domestic market to ramp up revenues, a market always on backseat for Indian IT companies riding the outsourcing wave. The tides are however turning. Many tech biggies are looking at the domestic Market for serious money as the differential between domestic and export markets gets narrower.
The maths is simpler. At present domestic markets allow a profit margin of about 5-6% compared to about 27-28% in the exports market. One of the main reasons for this tilt towards export markets is the tax benefits accruing from Sections 10A and 10B of the Income Tax Act, allowing tech firms tax sops on profits derived from export of computers software.
The party could soon get over as these sops are set to get over by 2009-end, leading to IT exporters getting included within the tax domain like most other taxpayers. In addition, the rising rupee and wage inflation could all work together to pull export margin down to about 10-12%. Hence, the domestic market may just be the cushion to save tech companies from eroding margins.
In the domestic market, e-governance, domestic defense-related projects, banking, financial sector and insurance (BFSI) and telecom could be the growth areas.
The government is pushing for e-governance initiatives like online filing of returns and Right to Information for most states, leading to increased need for IT support. Some estimates put the e-governance market size at about Rs 2 lakh crore over the next five years, out of which the government has already allocated about Rs 25,000 crore annually for e-governance initiatives in various states. Large investments by the government into e-governance have been one of the biggest catalysts for growth of the domestic IT market. The work involved will be largely low end jobs such as data entry, but costs of domestic operation are lower, so margins will become very competitive.
Major companies are already making inroads into the sector. For example, Tata Consultancy Services (TCS) has invested heavily into projects planned by the Center under the National e-Governance Plan (NeGP) while Wipro has also undertaken some e-governance initiatives for the West Bengal (India) government. Similarly companies are foraying into the Indian defense arena projects. With a framework based approach, IT are proactively targeting government bodies right from local authorities to central ministries. It involves understanding of governance and replication of project across the states.
Similarly about a third of Infotechâ€™s revenue comes from domestic market, out of which a big chunk of about 50% can be attributed to the e-governance secto. Other firms tapping this revenue stream include CMC and Vakrangi Software.
Domestic BSFI and Telecom are other growth areas and most big players are investing heavily into this space. What will drive the growth in the domestic market for India is the adoption of technology is non-metros. The banking and telecom sectors are embracing global technology it requires plenty of IT support. This is driving up the technology adoption in the non-metros, as local players have to invest into technology to get business. Take micro-finance for instance, where rural sectors have switched over to biometric enabled smart cards. This entire revolution requires a lot of data collection and data mining, which will only go up as the non-metros adapt to the technology.