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Cisco Could Win Big From This Emerging Market

By Harsh Chauhan - Updated Apr 24, 2019 at 10:31PM

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The networking giant is in a solid position to capitalize on India's digitization boom.

Cisco Systems (CSCO 2.73%) CEO Chuck Robbins is hopeful that India will supply 10% of its global revenue within the next decade thanks to the growing digitization in the country. The networking giant is making a play on several sectors in India, including telecom equipment, cybersecurity, software, and even connected cars.

However, it won't be surprising to see the company hitting its target earlier than Robbins' expectations despite a few hiccups in recent years. Let's see where Cisco currently stands in India and why the country could become the next big growth driver for the company.

Woman drawing an abstract representation of connectivity.

Image Source: Getty Images.

The story so far

Cisco crossed $1 billion in India revenue back in 2016. But it ran into problems thanks to exits at the  top management level and was accused of dressing up its revenue growth in the country. Additionally, it was reportedly losing ground to rivals on the enterprise side, and the fact that it was embroiled in a corruption scandal involving government agencies didn't help its case either. Such hiccups are probably why Robbins expects that Cisco will take 5 to 10 years to get 10% of its total revenue from India when previous estimates would have had the goal achieved by 2020.

Cisco's India revenue is growing at a faster pace than its global revenue. The company is reportedly averaging 14% growth in the Indian market, while its overall revenue increased 8% year over year last quarter. What's more, the company gets 40% of its Indian revenue from software sales, which is higher than the 33% global average.

As such, the Indian market is not only capable of boosting Cisco's overall revenue but can also enhance profitability. That's why it is important to look ahead and take a closer look at the catalysts that could drive Cisco's growth in this market.

A play on India's digitization initiatives

Smartphone and internet penetration are still low in India. Cisco estimates that only 27% of Indians were using a smartphone in 2017, but the number is expected to double in the coming four years. That will create a massive data boom, with Cisco estimating that internet networks in the country will witness a 490% increase in data traffic in the next five years.

Not surprisingly, demand for networking equipment in India is booming right now, presenting a great opportunity for Cisco. IDC estimates that India's communications and networking market grew 67% during the third quarter of 2018. The Ethernet switch market, for instance, shot up 34% annually to $160 million during the quarter, and Cisco commanded nearly two-thirds of the same.

Similarly, Cisco controls three-fourths of the router market in India, which showed exemplary annual growth of 140% last quarter to $215 million. The company also commanded nearly a fourth of the country's wireless local-area network (WLAN) market, which increased 12% annually to a size of $54 million.

So the networking and communications market in India was worth $430 million in the third quarter of 2018, and Cisco controlled nearly two-thirds of it. As such, the company is clocking an annual revenue run rate of more than $1 billion in the Indian market from the networking hardware side.

Looking ahead, there's good reason to believe that the networking market in the country will keep growing at an impressive rate because of the impending 5G deployments. Cisco estimates that commercial 5G pilots will commence in India in 2021, triggering a new era of investments by telecom providers. The company has already been invited by the Indian government to partner on 5G trials, so it has a foot in the door.

But hardware is not the only growth driver for Cisco in India. The company gets around half of its revenue by providing connectivity to small and medium-sized businesses (SMBs) in the country, a segment that's currently clocking 20% annual growth. Looking ahead, Cisco estimates that its SMB customer count will triple by 2020 as it makes connectivity accessible with affordable pricing plans.

So Cisco is going after diverse opportunities in the Indian market that are growing at a faster rate than the pace of its current revenue growth in the country. As such, it won't be surprising to see India supplying 10% of the company's global revenue earlier than Robbins' expectations.

Check out the latest Cisco Systems earnings call transcript.

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