Choice of the industry: IT Industry

Justification of the choice of industry and players

1. Keeping current dismal economic scenario in mind, IT services industry is direct exposed to parameters such as GDP growth, inflation and exchange rates. 2. The IT industry caters to a wide range of industries such as Banking and Financial Services, Insurance, Telecom, Manufacturing, Retail & Distribution, Life Sciences, Energy, Media, Travel and Government. 3. Their revenue model covers many methods of service delivery such as fixed price, fixed time frame and time-and-material. 4. Foreign currency transactions of these companies and the practices followed.
The companies being studied for this exercise are: 1. TCS: Tata Consultancy Services is an IT services, business solutions and outsourcing organization. TCS is part of the Tata group, one of India’s largest industrial conglomerates and most respected brands. Revenue of $10.17 billion (FY12). 2. Infosys: Infosys Limited was started in 1981 by seven people with US$ 250. Today, Infosys is a global leader in consulting, technology and outsourcing with revenues of US$ 6.994 billion (FY12). Many of the world’s most successful organizations rely on Infosys to deliver measurable business value. Infosys provides business consulting, technology, engineering and outsourcing services to help clients in over 30 countries build tomorrow’s enterprise. 3. MindTree: MindTree was started in August 1999 by a diverse team of 10 professionals who came from three different nations and had already scripted successful careers. Mindtree provides IT services and Product Engineering services to leading global organizations with revenues of $284 million (FY12).
IT Industry Overview
The Indian IT Industry’s services sector has evolved from application development and maintenance services to full service players in product development, testing, system integration, consulting and infrastructure.
The vast base of services covers almost every other potential industry. The prime industries catered are Banking and Financial Services, Insurance, Telecom, Manufacturing, Retail & Distribution, Life Sciences, Energy, Media, Travel and Government.
The table below gives the size of the IT Industry (IT Services and Software Products and Engineering Services) from exports and domestic point of view. Year | 2009-10 | 2010-11(Estimated) | Exports Revenue ( US $ billion) | 37.3 | 44.8 | Domestic Revenue (US $ billion) | 12 | 14.4 |
Source: CRISIL Research Report: Indian IT Industry Overview, Published On Aug 02, 2011
The Global IT services spending in year 2009 was US $ 566bn and it increased to US $ 574bn in 2010. The market of stated spending were divides as specified in table below. Region | Year | Market Share | America | 2010 | 43% | Europe, Middle East and Africa | 2010 | 39.7% | Asia Pacific | 2010 | 17.3% | Source: TCS_Annual_Report_2010-2011
The American and European markets are the chief contributors to Indian IT Industry in terms of revenues, which falls in-line with the global spending on IT Services.
Macroeconomic Analysis
The impact of macro-economic factors, which primarily affect the Indian IT Industry has been classified below.
Gross Domestic Product:
The revenues of the Indian IT Industry primarily come from American and European regions. American and European economies’ GDPs directly guide the future growth of the Indian IT Industry. The growth in GDP maps straight with the growth of companies operating in that economy, in turn the growth in the IT spending by those companies.
The growth figures of US economy (major contributor to the Indian IT industry revenue) are not promising at all. As per an article published by Reuters, “GDP growth is expected to decelerate sharply to 1.8 percent in the first quarter, still better than November's forecast of 1.7 percent. For 2012 as a whole, growth is seen at 2.1 percent, unchanged from the survey last month”. [3]
Exchange Rate fluctuations
The Indian rupee has been touching new lows in May 2012. The Max and Min value of rupee vis-à-vis US dollar is 55.9947 and 47.0663 (period of Nov 28, 2011 to May 24, 2012). [1]
Most of the IT Service companies receive revenues in form of US $. The falling value of rupee though add some cheer to the companies but the effect is negated by pressure from customers to reduce pricing e.g. in previous quarter the HCL Tech’s pricing was down 1.4 percent. [2]
In addition, most firms enter in future contracts to hedge their losses, so the short span steep falls do not directly map to profit for firms.
Inflation
Rising inflation has added to increase in employee costs (which forms main part of operation expenses) and other areas such as office rentals, computers, equipment and cost of administrative stationery.
Attrition and Hiring
The attrition rates tend to decrease in gloomy economic situation, providing an advantage to IT Services firm. The reduced figures of future revenue growth estimates leads to slow down in the hiring process, specifically fresh people from campuses, thereby increasing the average age of talent in the company.
Leading players in the IT industry
The leading companies in the information technology industry of India are Wipro Ltd, Aditya Technologies, NIIT Ltd, Asset Infotech Ltd, Patni Computer Systems (P) Ltd, Atari Informatics Ltd, Polaris Software Lab Ltd, Baan Info Systems India P Ltd, B-commerce Infosystems Pvt Ltd, HCL Infosystems Ltd, Cerulean Information Technology Pvt Ltd, Hexaware Technologies Ltd, Iflex Solutions Ltd, CMC Ltd, Igate Global Solutions Ltd, HCL Corporation Ltd, Infosys Technologies Ltd, Satyam Computer Services Ltd, Larsen & Toubro Ltd, Tata Consultancy Services, Tata Infotech Ltd and Mastek Ltd.
Major Accounting policies in the industry:
The financial statements in the IT industry are prepared in accordance with Indian Generally Accepted Accounting Principles (GAAP). GAAP comprises Accounting Standards specified in the Companies (Accounting Standards) Rules, 2006, Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI).
Software products developed and Software services are the major sources of revenue for the IT industry.
Revenue Recognition practices:
Services:
Arrangements with customers for software development and related services are either on a fixed price or time and material basis.
Fixed price contracts:
In this mode, the company agrees to supply a set of deliverables in a specified time period for a price. Revenue from fixed price contracts is recognised using the proportionate completion method, which is determined by relating the actual project cost of work performed to date to the estimated total project cost for each contract.
Annual technical services revenue and revenue from Fixed Price maintenance contracts are recognised rateably over the period in which services are rendered.
Time and Material:
In this mode, companies provide resources for a price agreed upon for a specified duration. Revenues and costs relating to time and materials contracts are recognized as the related services are rendered and related costs are incurred.
Software Products:
Revenues from sale of software licenses are recognised upon delivery where there is no customisation required. In case of customisation that requires significant implementation services, revenue for the entire arrangement is recognised over the implementation period based on the percentage of completion method. Revenue from client training, support and other services arising due to the sale of software products is recognised as the related service is performed.
Research and Development:
Expenditure on research and development activities is recognised as an expense in the period in which it is incurred. Software product development costs are expensed as incurred unless technical and commercial feasibility of the project is demonstrated, future economic benefits are probable, the Company has an intention and ability to complete and use or sell the software and the costs can be measured reliably.
Foreign Currency transactions:
Income and expense in foreign currencies are converted at exchange rates prevailing on the date of the transaction.
Foreign currency monetary assets and liabilities other than net investments in non-integral foreign operations are translated at the exchange rate prevailing on the balance sheet date.
Companies use foreign exchange forward and options contracts to hedge its exposure to movements in foreign exchange rates.
Depreciation and Amortization
Details of items covered in Depreciation and Amortization is listed in the Annual Reports. Each company is depreciating Computer & Equipments and Intellectual Properties as per their definition of useful life of these assets. All companies are following Straight-Line method for depreciation.

The accounting policies of the Indian companies were compared with international companies like IBM, CTS. We find that these companies prepare their reports based on the US GAAP. In addition to the above practices we find the below additions:
The reports detail in more clarity on certain aspects of the business: 1. Internal Use Software (Software developed for internal use of the company):
From CTS Annual report 2011:
‘Internal Use Software. Costs for software developed or obtained for internal use are capitalized, including the salaries and benefits of employees that are directly involved in the installation of such software. The capitalized costs are amortized on a straight-line basis over the lesser of three years or the software’s useful life.
Costs associated with preliminary project stage activities, training, maintenance and all other post implementation stage activities are expensed as incurred.’

2. Accounting practices where original estimates of revenues, costs change:
From IBM Annual report:
‘If circumstances arise that change the original estimates of revenues, costs, or extent of progress toward completion, revisions to the estimates are made. These revisions may result in increases or decreases in estimated revenues or costs, and such revisions are reflected in income in the period in which the circumstances that gave rise to the revision become known by management.
The company performs ongoing profitability analyses of its services contracts accounted for under the POC method in order to determine whether the latest estimates of revenue, costs and profits require updating. If at any time these estimates indicate that the contract will be unprofitable, the entire estimated loss for the remainder of the contract is recorded immediately. For non-POC method service contracts, any losses are recorded as incurred.’.