GA2008_Nasscom

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Copyright NASSCOM 2008

India Inc.

An overview of the IT-BPO sector inIndia

March, 2008

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Agenda

1. The rise of theIndian economy

The Indian economy at a glance Drivers of rapid growth

2. Dynamics of theIndian IT-BPOindustry

3. Sustaining Indiasvalue proposition

Current trends Future outlook

Talent availability

Cost competitiveness

Risk management

Business environment

Value-add

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India fact sheet

Demographics

Population (billion) 1.12Population growth (%) 1.6

Labor force (million) 516

Less than 30 years (%) 52

Urbanization (%) 28

Economy

GDP (nominal, US$billion, FY08E) 1135

Inflation (%) 3.5

Fiscal Deficit (% ofGDP)

6.1

FDI (US$ billion) 19.5

Forex reserve (US$

billion, FY08E)

280

Social/Developmental

Literacy (%) 61

Unemployment (%) 7.2

Infant mortality (per 1000) 34.6

Life expectancy (years) 68.5

Transport/Telecom

Passenger cars (million) 13

Two wheelers (million) 53

Mobile users (million) 240

Internet users (million) 32

Trade

Exports(US$ billion)

126

Imports(US$ billion)

191

Top 3 export markets US (17%)UAE (8.3%)China (7.7%)

Top 3 import partnersChina (8.7%)US (6%)Germany (4.7%)

FY 07 unless indicated otherwise

Highlights

Trillion Dollar Economy 4 th largestin terms of PPP

India's National Stock Exchange(NSE) ranks first in the stock futurestrade

World's largest sales of mobilephones (24.5 million in Q3 2007)

2nd largest two-wheeler and 4thlargest passenger car market

Fastest growing domestic retailmarket, US$ 350 billion in 2007

Sources: IBEF, EIU, RBI, CIA fact book

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The Indian economy at a glance (1/2)

The Indian economy has experienced rapid growth buoyed by a shift from anagriculture to a services-led economy

India

DevelopingWorldAverage

Developed

WorldAverage

Real GDP growthPercentage, 1991-2007

Manufacturing Agriculture

Services

Composition of Indias GDP, 2007( ) - share in 1991

Source: Usda.gov Source: Economic Survey

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The Indian economy at a glance (2/2)

Economic performance is strong and validated by growing investment confidence

FDI confidence index, 2007

Source: AT Kearney

Low High0-3 scale

Rating S&P Moodys Fitch

Sovereign creditrating

BB-

(InvestmentGrade)

Baa2

(InvestmentGrade)

BBB-

(InvestmentGrade)

Credit outlook Positive Stable Stable

Fiscal deficit (% GDP)

Forex (US$ billion) Consumption (% YOY)

Macro-economic indicators

Credit ratings

Source: Credit rating websites

Source: Economic survey, Citigroup

Exports (US$ billion)

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Key drivers of rapid growth (1/4)

Lifting of import restrictions

Streamlining of tariff structure

De-licensing and re-deregulation of sectors,e.g., Telecom, Civil Aviation, Infrastructure

Progressive ease of FDI caps

The rapid growth of the Indian economy has been driven by a unique combinationof progressive liberalization

Free-market competition driving costs downand quality up

Telecom example

Subscriber base(millions)

Long distance tariffs(US$ per min)

Progressive liberalization from 1991 Impact

Upsurge in international investment

0.05x15x

Source: Merrill Lynch

FDI growth(US$ million)

Source: Ministry of Commerce

95x

Rating Pre-91 1994-95

Maximumexcise duty

105% 70%

Maximumimport duty

400% 65%

Examples

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in an inherently lower-cost economy

Inherent lower-cost economy

Good/ Service Price in US(US$)

Eq. price inIndia (US$)

Coke bottle 2 0.2

Peak mobile rate(per min.)

0.3 0.05

Taxi (per km) 1 0.2

Skilled labor manufacturing(per hour)

25 5

US/India GDP (PPP) ratio

Impact

Price comparison US vs. India*

Sustained growth in exports - reputation aslow-cost, high quality sourcing destination

for goods and services

India exports, US$ billion

* Indicative based on ranges

Sustained PPPadvantage

Source: Morgan Stanley

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Source: UN, WTO

India

SE Asia

Latin Am.

China

USA

Japan

Europe

Working age population19-59 years, 2007

along with the significant advantage of a large & young working-age populationwith a strong domestic consumption group

Indian middle-class household growth2002-2006

16.5


Highest growth (~6% from 2005) Constant median age of ~25 yearsfor the last 25 years

16.5 million households (~80million people) added over 4 years- greater than the population ofUK!

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Source : BCG

47Mn

19Mn 7

Mn

3Mn

5Mn

3Mn

India

Bangladesh

Pakistan

Iran

Brazil

Mexico

Philippines

5Mn

4Mn

Vietnam

2Mn

Turkey

-10Mn

China

-6Mn

Russia

5Mn

Indonesia

1Mn

Malaysia

0Mn

Ireland

Israel0Mn

Iraq

2Mn

-1Mn

CzechRepublic

4Mn

Egypt

-17MnUS *

-2 MnUK

-2 Mn

Italy

-3 Mn

France

-9 Mn Japan

* -5.6 min 2010

Global working age population 2020

With an increasing imbalance in the global workforce, Indias demographicadvantage is likely to be a key driver of future growth

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Summary of key messages

As a rapidly growing market based on sound fundamentals, India has become a

leading center for global sourcing of goods and services

Indias growth is driven by a unique combination of a progressive free-marketpolicy, a low cost structure, and a sustained demographic advantage

Global workforce imbalances are likely to increase Indias significance as a keysource of talent for services

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Agenda

1. The rise of the Indianeconomy





Talent availability


Risk management


Value-add

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The Indian IT-BPO industry at a glance

FY04 FY05 FY06 FY07 FY08E

21.6

28.5

37.4

48.1

64.03.6%4.1%

4.7%5.2% 5.5%

32%

31%

29%

33%

US$ billion, percentage

Indian IT-BPO SectorRevenue Aggregate and Share of GDP

Exports

Domestic

Percentage of GDP

Sustained exportgrowth revalidates

strong fundamentals

Revenue aggregate asa percentage of GDPcontinues to rise

Source: NASSCOM

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Employment

Direct Employment 000s

IndirectDirect TotalEmployment

9-10mn7-8mn

~2mn

FY2007 FY2008E

Direct employment to reach nearly 2 million; indirect job creation estimated at 7-8million

FY2008 estimates

~2 millionprofessionalsemployed directly

Indirectemployment ~4x,creating additional7-8 million jobs

Source: NASSCOM Source: NASSCOM

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Exports

100% = US$ 64 billion

DomesticMarket

Exports 62-66%

34-38%

*Includes product development and engineering** Negligible

Export revenue remains the mainstay with steady growth across segments;Industry structure is well-balanced between Indian and Global providers

12%

18%

70%

40%

27.5%

32%

28%

Sourcing model

BPO

IT*

Global Captives

Global Providers

Indian Providers

**

29%

30%

28%

Source: NASSCOM Source: NASSCOM

28%

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Domestic market

DomesticMarket

Exports 62-66%

34-38%

Domestic market is gaining momentum, driven by overall economic growth,increased adoption of technology and outsourcing

100% = US$ 64 billion

Rapid economic growth

Increased consumption ofgoods and services

Growth in tech-relatedspends by enterprises

Internet connectivity

Source: NASSCOM

44%

38%

43%

44%

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61%

18%

12%

6%

2%

Geographic exposure exports

US

UK

ContinentalEurope1

APAC2ROW

100% = US$ 31.4 billion*

30%

US

UKContinental Europe

APAC

43%

>55%

36%

Percentage

FY2007

CAGR FY2004-07FY2007

FY2004

Indian IT-BPO Exports grew at a CAGR of 35% over FY2004-07

Excludes hardware exports

1 Top 3 countries include Germany (~2.5%), Netherlands (~2%), Switzerland (~1%)2 Top 3 countries include Australia (~1.5%), Japan (~1.5%), and Singapore (~1.3%)

While US and UK remain the dominant markets, the industry is steadily increasingits exposure to other geographies

Source: NASSCOM

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Banking, FinancialServices, Insurance andHi-tech / Telecomaccount for nearly 60%of Indian IT-BPO exports

Manufacturing and retail

are other large sectors

Airlines, media,healthcare and utilitiesare some emerging high-growth sectors

Vertical exposure

FY2007

* Excludes hardware exports

Vertical market exposure for industry exports is well balanced across severalmature and emerging sectors

BFSI40%

Hi-tech / Telecom19%

Manufacturing15%

Retail8%

Media, Publishing andEntertainment

3%

Construction and Utilities4%

Healthcare3%

Airlines andTransportation

3%Other

5%

Source: NASSCOM

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Service portfolio

CoveragePercentage of full service

Revenue Split by Service Offered

FY2008E

Export growth is also being supported by increasing breadth and maturity of theservice portfolio

44%

22%

3%

1%

8%

4%

18%

CustomerInteraction &Support

Finance &Accounting

Human Resources Mgmt.

Procurement Services

KnowledgeServices

OtherHorizontal

Services

Vertical-specific BPOServices

100% = US$ 10.3 billion

BPO EXAMPLE

25

15

15

14

11

42

34

35

48

22

82

76

73

100

42

CustomerInteraction &

Support

Finance &Accounting

KnowledgeServices

ProcurementServices

Human ResourcesManagement

Best in class 2007 2007 2005 2004

Source: NASSCOMSource: NASSCOM

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Buyer needs

driven by mature buyer needs evolving towards beyond-cost benefits

Source: NASSCOM-Mckinsey Report 2005

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Footprint

Significant addition of onshore presenceenabling firms to offer end-to-end service

capabilities

Progressive near-shoreexpansion to enhancefollow-the-sun andmulti-lingual capabilities

Over 77 cities*across more than25 countries

Global Delivery Footprint of Indian IT-BPO Firms

* Excludes Indian cities / India

Expanding Global Delivery capabilities complemented by a widening serviceportfolio is helping providers deepen client relationships

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Distribution of exports by region in India

Bangalore 36%

Mumbai, Pune 15%

Chennai 15%

New Delhi, Noida,Gurgaon

17%

Hyderabad 14%

The industry is well spread across multiple Indian locations. Additionally, the nextwave of locations is on the rise.

Others 3%

Source: NASSCOM

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Addressable market of at leastUS$ 380 billion (2007-08)

Addressablemarket

Currentsize

Global Sourcing of IT & Engineering Services

5-6x~220 - 250

~44-47

15-18

>29

Others

India**

Global Sourcing of BPO Services

6-7x~160 - 190

~26-29

Addressablemarket

Currentsize

15-18

~11

Others

India**

Future outlook

US$ billion

With strong fundamentals and significant head-room, the Indian IT-BPO industry iswell placed to further expand its share of worldwide IT-BPO spending

Source: NASSCOM analysis based on NASSCOM-Mckinsey Report 2005

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The Indian IT-BPO market continues to grow at a robust pace revalidating its

strong fundamentals

While exports remains the mainstay, the domestic market is gaining momentum

With the industry maturing, it is well distributed across a breadth of servicesand verticals

While US and UK continue to be the dominant markets, Continental Europe hasexhibited strongest growth over the last two years

Going forward, the Indian IT-BPO industry is poised to expand significantly onthe back of its strong fundamentals and global head-room

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Agenda

1. The rise of the Indianeconomy





Talent availability


Risk management


Value-add

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Is Indias value proposition sustainable?

High attrition and wage inflation is Indias talent pool running dry?

Talent availability

Costcompetitiveness

Risk management

Businessenvironment

Value-add

Common questions...

With cost increases, is India still cost competitive?

How have quality and security standards matured?

What is the environmental risk exposure?

Will policy and infrastructure keep pace with the industrysrapid growth?

Can India-based providers rise to my evolving needs?

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1. Talent availability (1/3)

Overall, Indias large talent capacity is well placed to meet industry demand

TechnicalGraduates

000s

Non-technicalGraduates

000s

Annual Output Composition

Postgraduates3 yr Eng. Dip. / MCA

4 yr Eng.Degree

ScienceGraduates

CommerceGraduates

Arts + OtherGraduates

Year Net employeeaddition (000s)

FY 08E 375

FY 06 328

FY 05 234

IT-BPO Demand

Source: NASSCOM

Source: NASSCOM

Source: NASSCOM

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However, talent suitability is a concern, with higher attrition and wage inflation asthe lead indicators of a talent crunch

Demand/ Supply Gap

Root causes

Employable pool

Basic skills

Access to talentoutside key cities

Specialized skill pool

Project management

Technical skills

Attrition

Wage Inflation

Rapid influx of new and scale-up of existing companies

Aggressive lateral hiring tolower training investment

Rapid growth

High entry-levelchurn

Premium forspecialized skills

Max. churn at 0-3 year level

Primarily due to lack ofcompany loyalty

Increased demand forspecialized skills e.g., sixsigma, project management

Lead indicators

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Recognizing this imperative, the industry is proactively working on severalinitiatives to strengthen Indias long-term cost advantage

Short Term

Medium Term

Long Term

Enhance overall yield

Improve employability Expand to tier 2

locations

Lower skill dependence

Objectives Initiatives

NAC, NAC-Tech: Entry-level assessment for

BPO and IT Finishing schools

Location studies and engagement with stategovernments to expand tier 2 locations

Lower traininginvestment

Enhance specialist skillsand project managementexpertise

Add education capacity

Promote educationreform

FDP, Faculty Development Program: toincrease the suitability of teachers

Facilitating industry access to specialistprograms offered by independent agencies

Expansion of higher-educationinfrastructure: government to set-up 20 newIIITs

Program to increase PhDs in technology

NASSCOM VC fund focused on technologyinnovation

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2. Cost competitiveness (1/3)

Despite cost increases, India continues to leverage its cost structure to deliver acompelling cost advantage

Loaded Costs per IT FTE p.a.2007, US$ 000s

Source: Everest, NASSCOM

Break-up of Loaded Costs2007, Percentage

Source: NASSCOM estimates

Salary

Delivery OHFacilities

INDICATIVE

SG&A

Lowerimpact ofwageinflation

Semi-variable

Non-linearinflation

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2. Cost competitiveness (3/3)

2 0 0 7 2 0 08 2 0 0 9 2 0 1 0 2 0 11 2 0 1 2 2 0 1 3 2 0 14 2 0 15

@ 3%

India @ 28K

~67%

Projected cost comparison, 2007-2015US$

~60%

~53%

Additionally, Indias long-term cost advantage is likely to remain robust

Source: NASSCOM estimates

US @ 100K

Wage @ 5%Other @ 5%

Wage @ 10%Other @ 5%

Wage @ 15%Other @ 5%

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3. Risk management: quality and data security (1/2)

Standards

Physicalsecurity

Personnelsecurity

Compliance with global standards

e.g., ISO 27001, CoBIT Contractual safeguards, robust

BCP/DR planning

Networksecurity

Laws

Secure design, documentation &implementation of network e.g.,firewall, antivirus encryption

Isolation of sensitive areas Access control systems e.g., CCTV

surveillance, security guards

Background checks

Non-disclosure agreements

Compliance with international laws Strengthening of Indian legal system

Highest number of ISO 27001

certifications obtained globally

Documented security policies coveringuse of information, mobile computing,user access

Robust and uniform practices forphysical security in delivery centres

National Skills registry (NSR) tofacilitate personnel background checks

Cyber security training and awareness

Amendments to strengthen the IT Act2000 and Indian Penal Code underparliament review

Objectives Initiatives/Impact

In addition, the industry continues to evolve its already high standards for datasecurity and IP protection

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Engage

Enforce

Enact

Engaging policy makers, industry players,

enforcement agencies, etc. to build commonunderstanding of data security issues

Educate Educating industry constituents about data security

best practices through publications, conferences,and training programs

Enacting policy reform including:a) strengthening the legal frameworkb) addressing country-specific challengesc) establishing a national security frameworkd) encouraging adoption of best practices

Enforcing compliance through periodic audits,

certification, incident response databases, andcooperation with enforcement agencies

Objectives

and is adopting a four-pronged program to institutionalize ongoing efforts

Data SecurityCouncil of India

(DSCI) setup asfirst-of-its kindself-regulatoryorganization

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3. Risk management: environmental risk exposure

Tried and tested - Multiple centersof significant scale withestablished firm-level practicesand maturity in BCP and DR

Well distributed - Industry

dispersed across the breadth ofthe country, e.g., Mumbai, NewDelhi, Chennai

Additionally, low geopolitical and concentration risks provide India with a favorableecosystem for the sustained growth of the IT-BPO industry

Stable democracy

Neutral external affairs policies

Consistent economic agenda topush free-market reforms

Conducive business environmentwith established practices

Concentration Risk Geopolitical Risk

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4. Business environment (1/3)

The strong growth of the Indian IT-BPO industry is complemented by a sustainedemphasis on creating an enabling business environment

0

20

40

60

80

100

Pre-1990 2007-122001-071990-2000

Early investmenton education (e.g.IITs/ IIMs), scienceand R&D (e.g.CSIR)

1991: STPI formed topromote the Indian IT-

BPO industry1991onwards: Economicliberalization1994 onwards: Telecomsector de-regulation

2001 onwards:Progressive reformcontinues; regulareasing of fiscal /procedural issues2005: SEZ Actintroduced with specialprovisions for IT-BPO

Alignment ofdevelopmentalpolicy with industryneeds; education

and infrastructureare key priorities

Indian IT-BPO Growth

US$ Billion

Key policy actions that have aided IT-BPO growth

EstimateForecast

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SEZs are expected to build on the success of STPI at a larger scale

IT SEZs

Other SEZs

IT-BPO Sector Accounts for the Highest Numberof Proposed SEZs (Total# = 572)

SEZ Highlights

SEZ highlights

Term 15 years

Fiscal benefits 100% tax holiday for first 5 years, 50% for next 5 years, and up to 50% forbalance 5 years

Exemption from excise duties, service and sales taxes

Location and size Restricted to prescribed zones with a minimum area of 25 acres

Other Procedural ease, single-window clearance

Almost all IT SEZs have formal approval

Source: NASSCOM, CLSA

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Further, the government has prioritized infrastructure development through PPP-led initiatives to address current infrastructure lags

Infrastructure development initiativesHighlights from key sectors

Sector Current status FY 07 spend(US$ bill.)

Key policy initiatives

Roads 10% of national highwaysfour-laned

Average speed less than50 km/hr

7.8 Seven phase nationalhighway developmentprogram

Telecom India has done well here.Average per min costdecreased by 90% over 7years

2.1 FDI limit increased from49% to 74%

Airports Top 6 airports (~75% oftraffic) currentlyoverstretched

3 Modernization programcovering 6 main citiesand 35 tier 2 cities

Power High cost of electricity,losses due to theft 15.7 Accelerated PowerDevelopment Program Mega Power projects

Public-Private Partnership

Capital grants and long-termannuity support to encourageprivate sector participation

Further encouragement offoreign investment to supportcapex requirements

Mumbai and Delhi airportsmodernized by private players

Greenfield airports atBangalore and Hyderabad Q1,Q2 2008

~ 20% of generation capacityfrom private sector


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5. Value-add

The Indian IT-BPO industry is actively building on its leadership position to deliverbeyond cost benefits to global buyers

0

2 0

4 0

6 0

8 0

1 0 0

2 0 0 2 0 0 2 0 0 2 0 0

Key benefits driving companies to offshore

Percentage

ofrespo

nses

Savings

QualityProcessredesign

Speed to

market

Access tonewmarkets

Skills

Source: Duke Offshoring Research Network (ORN)

Global deliverymodel

Innovation

Processmaturity

Expansion of delivery networkto include nearshore andonshore centres

Provision of 24x7 services

End-to-end process deliverycapabilities

Active service-level

improvement Process reengineering

expertise

Service innovation e.g.,customization for new markets

Active IP creation increasedfiling of patents

Key value-add initiatives

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India has the raw talent capacity to comfortably service the IT-BPO industry in

the future. While talent suitability is a concern, industry initiatives such as NACwill help improve overall employability

Despite cost increases, the Indian IT-BPO industry continues to leverage itslower cost structure to deliver a compelling cost advantage

Overall risk exposure is low with mature quality and data security mechanismsand negligible geopolitical risk

Proactive government policy is helping address existing infrastructure gaps.Further, SEZs will take over from STPI in propelling industry growth.

Providers are maturing their service delivery capabilities to actively delivervalue-adds through global delivery models, process expertise, and innovation

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THANK YOU

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European market

Within Europe, BPO is forecast to exhibit strongest growth

Source: Ovum

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Quality continues to be a key focus for Indian IT-BPO companies in an industry-wide manner

Features

Impact

Phase I

Phase II

Phase III

Progressive maturity ofCMM certifications a

Highest number of CMMcertified units 498 as of

Dec., 07, 85 CMM Level 5

Enhancement of qualitymanagement tools andprocesses withadaptations for remote

service delivery

Emphasis on softwareengineering

Alignment of QMS withCMM framework

Adoption of People CMMand Six Sigmamethodologies to deliverend-to-end quality

Industrialization ofservices

Creation of basicprocesses

Alignment of QualityManagement Systems

(QMS) with globalstandards (e.g. ISO)

Framework formeasurable improvement

Consistent execution ofengagements

Over 90% clients provide repeat business!

GA2008_Nasscom

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