Vol 7. Issue 4. 1 - 30 NOV 2020 | For Private Circulation Only pg 4. GCCs IN INDIA - To be or not to be... pg 41. Interview: Mr Sashidharan Balasundaram, ISG Research pg 44. Indian Economy: Trend Indicators pg 46. PhillipCapital Coverage Universe Ground View - Previous Issues GROUND VIEW Vol 7. Issue 4. 1 - 30 NOVEMBER 2020 MANAGING DIRECTOR & CEO IT SERVICES Vineet Bhatnagar Vibhor Singhal Karan Uppal EDITORIAL BOARD Manish Agarwalla INFRASTRUCTURE Kinshuk Bharti Tiwari Vibhor Singhal Deepika Bhandari DESIGN & ILLUSTRATION Chaitanya Modak LOGISTICS, www.inhousedesign.co.in TRANSPORTATION Vikram Suryavanshi EDITOR Roshan Sony MEDIA, CONSUMER DISCRETIONARY HEAD- INSTITUTIONAL Ankit Kedia st st EQUITIES 1 Sep 2020 Vol 7. Issue 3 1 Jul 2020 Vol 7. Issue 2 Kinshuk Bharti Tiwari METALS Vikash Singh RESEARCH AUTOMOBILES MIDCAPS Saksham Kaushal Deepak Agarwal Amar Kant Gaur Vineet Shanker AGRI INPUTS REAL-ESTATE Deepak Chitroda Vaibhav Agarwal Dhaval Somaiya BANKING, NBFCs Manish Agarwalla STRATEGY Sujal Kumar Anjali Verma Pradeep Agrawal Manoj Rawat CONSUMER TECHNICALS Vishal Gutka Subodh Gupta Preeyam Tolia PRODUCTION MANAGER CEMENT Ganesh Deorukhkar Vaibhav Agarwal st EQUITY SALES & EVENTS 1 Feb 2020 Vol 7. Issue 1 1st Oct 2019 Vol 6. Issue 6 ECONOMICS Rosie Ferns Anjali Verma Navneeth Vijayan SALES & DISTRIBUTION Archan Vyas ENGINEERING, Ashka Gulati CAPITAL GOODS Jignesh Kanani Jonas Bhutta Sneha Baxi Sandesh Shetty Amarinder Sabharwal HEALTHCARE, CORPORATE SPECIALTY CHEMICALS COMMUNICATIONS Surya Patra Zarine Damania Hrishikesh Patole Mrunal Pawar Rishita Raja FOR EDITORIAL QUERIES PhillipCapital (India) Private Limited. No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400 013 [email protected] 1st July 2019 Vol 6. Issue 5 1st June 2019 Vol 6. Issue 4 2 GROUND VIEW 1 - 30 November 2020 1 - 30 November 2020 GROUND VIEW 3 Letter from the MD CONTENTS I would like to continue expressing my sincere gratitude to all frontline COVID-19 warriors; words cannot adequately capture their courage in fighting this crisis. As always, I hope you and your loved ones are staying safe and doing well. While the prolonged uncertainty, ups and downs, and anxiety continues, the silver lining – that we got to spend so much quality time with our loved ones – has been appreciated by many. We live in a different world now, and for the foreseeable future, it will be a ‘post-covid-19’ world. But the indomitable human spirit has prevailed and we have adapted both personally and professionally, faster-than-anticipated, to a virtual way of working. The show must indeed go on, and it has gone on, 4. COVER STORY considering everything that has happened. GCCs IN INDIA – To be or not to be... By Vibhor Singhal & Karan Uppal The pandemic has had an economic fallout across sectors. But what has turned out to be adversity for one, has emerged as an opportunity for others. While the Indian IT services vendors have 41. INTERVIEW seen a significant jump in the demand environment for their services, Mr Sashidharan the other part of the Indian IT ecosystem – the captives (or the Balasundaram, Global Capability Centers (GCCs)) have faced multiple headwinds Senior Manager, like Business Continuity Planning (BCP) issues and financial stress for ISG Research their parent organizations. This, our technology team believes, can lead to an unprecedented opportunity for IT services providers – in terms of acquiring some of these GCCs; a win-win situation for both the parties. Vibhor Singhal and Karan Uppal, from our technology 44. Indian Economy: Trend Indicators team, have dug deep into this scenario, and have carried out some interesting analysis of how the scenario could playout, and of who could be the potential winners and losers. 46. PhillipCapital Coverage Universe Valuation Summary In addition to this riveting story, they have also interviewed Mr Sashidharan Balasundaram, Senior Manager at ISG Research, one of the largest global IT consulting firms – to understand the GCC landscape in India, and how the current pandemic could impact it. Cheers and Best Wishes, Vineet Bhatnagar 2 GROUND VIEW 1 - 30 November 2020 1 - 30 November 2020 GROUND VIEW 3 COVER STORY BY VIBHOR SINGHAL & KARAN UPPAL pg. 6 INDIAN GCC LANDSCAPE How it all began ___________________________________ pg. 9 EVOLUTION OF GCCS IN INDIA From cost efficiency to value creation ___________________________________ pg. 18 FUTURE GROWTH POTENTIAL What’s in store for GCCs in India ___________________________________ pg. 22 INSOURCING-OUTSOURCING CYCLES Third-party vendors or captive centres? ___________________________________ pg. 25 FOCUS SECTION GCC Monetization – a massive opportunity for service providers ___________________________________ pg. 35 CRYSTAL GAZING Potential buyers and sellers ___________________________________ 4 GROUND VIEW 1 - 30 November 2020 1 - 30 November 2020 GROUND VIEW 5 The Indian IT industry, ever since its birth five decades ago, has always been composed of two critical parts – the third-party IT services providers (TCS, Infosys, Cognizant, etc.) and GCCs (Global Capability Centres – the captives). Both have their own important place in the ecosystem, and have grown together over the last five decades. This year, the Covid-19 pandemic has had a wide- ranging multi-dimensional impact on various industries. With the world moving to WFH (Work from Home), technology adoption has seen unexpected and unprecedented acceleration across enterprises and consumers. This has led to a significant reset in the demand environment for the technology industry, especially for Indian IT services vendors. As for the GCCs – when they were forced to shut operations due to the lockdowns imposed by various governments (including India), the world realized that many of them did not have credible Business Continuity Planning (BCP) and were not prepared for a WFH scenario. It is expected that the economic/financial crisis has led (or will lead) to many of the MNCs struggling financially, eventually leading them to terminate/postpone their plans to set-up/expand their GCCs in India/ROW. It is also widely anticipated that many MNCs might actually shut down their GCCs, by selling them off to IT services vendors – to effectively monetize their ‘non-core’ assets to remain financially viable. This presents an unprecedented opportunity for the Indian IT-services vendors, to acquire these talent houses, and boost their inorganic growth, while expanding their geographical, vertical and technological reach. It promises to be an interesting time ahead, with both parts of the Indian IT ecosystem looking to grow together while also at the cost of each other. 4 GROUND VIEW 1 - 30 November 2020 1 - 30 November 2020 GROUND VIEW 5 INDIAN GCC LANDSCAPE How it all began An overview of the Indian IT Services Industry and GCCs in India The beginning of the Indian IT industry The global technology outsourcing landscape India’s IT services industry was born in 1967 with the The global technology industry stands at US$ 2.5trillion creation of Tata Consultancy Services. In 1974, Burroughs (FY19, including ER&D, excluding products). It grew by 5.4% (an American mainframe manufacturing company) asked in 2019. In contrast, the global sourcing industry stands TCS (its India sales agent then) to provide programmers for at a mere US$ 300bn, just 12% of the global tech spend. the installation of system software for an American client. However, global sourcing spend has outgrown global tech This led to the birth of the Indian outsourcing industry. spend with a CAGR of 7% over the last five years. Simultaneously, the first software export zone, SEEPZ – a precursor to the modern-day IT park – was established in Mumbai in 1973. It has been almost five decades since then, The Indian outsourcing business and the IT industry has come a long way. It not only provides The Indian outsourcing industry stands at US$ 156bn critical support and services to thousands of companies (FY19: NASSCOM, including ER&D, excluding products) across the world, but it is also the largest private sector representing 53% market share of global sourcing – making employer in the country. it the leader in the industry, by far. A large part of the Indian In the 70s, the Indian IT industry struggled. The state then IT outsourcing industry comprises of the glamour boys such was hostile to it, imposing high import tariffs, as high as as TCS, Cognizant, Infosys, and Mindtree, and a plethora 135% on hardware and 100% on software. Eventually, in of third party service providers. However, a decent chunk 1984, a New Computer Policy (NCP-1984) was formulated, of it is composed of the captive centres – the GCCs – set which offered a package of reduced import tariffs (by 60%) up by various global companies in India. In 2019, GCCs on hardware and software. This gave life to the Indian IT contributed US$ 28bn to the Indian outsourcing industry, industry, that has today achieved a size of US$ 200bn – contributing to 7% of the country’s GDP. Global sourcing landscape (FY19) The beginning of GCCs or captives However, what is left unsaid most of the times, is the role of captives or GCCs (Global Capability Centres) in this growth and evolution of the industry. The history of captives in India started in 1985, with Texas instruments (TI) setting up its captive/R&D centre in Bengaluru. TI was attracted to India because of the country’s engineering talent and costs advantage. What followed was an avalanche of global companies setting up their captives in India, initially as cost centres, that have now evolved into full grown centres of innovation and IP creation. Source: NASSCOM Source: 6 GROUND VIEW 1 - 30 November 2020 1 - 30 November 2020 GROUND VIEW 7 making up for 20% of the overall business. Over the last five Salient features of the current GCC landscape in India years, GCCs have seen a higher CAGR of 9.9% compared to • No of MNCs with GCCs in India: 1,250+ the total Indian IT outsourcing industry CAGR of 8.4%.