The Hindu Business Line : `We will grow better than industry growth rates'

There will be four triggers to improvement of margins. One, is offshoring. Second is sheer volume growth. Three, build new practices where a part of the revenues comes in at a higher realisation. Four, bring process efficiency in software operations.

Mr Kishor Patil, CEO, and Managing Director, KPIT Cummins

Building and executing a differentiated business model has been the biggest challenge facing software companies in the medium-sized category. KPIT Cummins has been one among the few that has been able to meet this challenge. The company has evolved its model by focusing on two verticals — manufacturing and BFSI (Banking, Financial Services and Insurance). Using Cummins as an anchor customer, it has slowly broad based its client base to include four to five Fortune 500 customers whose orders could contribute more to revenues in the years ahead. Mr Kishor Patil, CEO and Managing Director, KPIT Cummins spoke to Investment World on key factors that could drive growth.

Excerpts from the interview

How did you build relationships with your key customers such as HP or Unilever?

Basically, we recognised a few of the constraints that we were working under. First thing we realised was that we did not have any brand value. Secondly, we did not have resources that the big companies have. Finally, looking at other successful companies, we found that they had GE or Citibank as their first and main customer and built their business on this base.

Cummins is our anchor customer. For other customers, we looked at those who were in the early stage of outsourcing and not the mature ones. We got engaged at an early stage. By doing so, we were able to nurture relationships before they appeared on the radars of the big companies.

Do you anticipate any slowdown in contribution from Cummins?

Leveraging of Cummins as a customer is in the form of additional services. We have started providing them with embedded services. We can also provide other services that move us up the value chain. There are at least ten services that we can add.

The second part is how can we leverage the relationship with Cummins to tap into its customers and suppliers. But this will take time. Incidentally, Cummins at the global level has had one of its better years with 37 per cent growth.

What is the nature and scope handled for your top ten customers?

All the customers within the Top-10 are very big. How much we can scale up revenues depends on our capability. Cummins, which is a $ 20 million relationship, is a big one, even for a tier-one company. All these relationship can be scaled up to $ 10 million and above. Over what period, I cannot say now.

We have decided to grow with the existing set of strategies that focus on key customers (such as HP or Unilever) and building new service lines (within the existing verticals) till we reach $ 100 million. Then, our strategy will be much stronger and can go after other customers for offshore services.

What would be the triggers for improvement of operating margins that is lower in comparison to several peers?

There would be four triggers to improvement of margins. One, as we increase offshoring, greater would be its contribution. Second is the sheer volume. Two, if you look at us three or four years ago, our overheads were 40 per cent of revenues.

As these do not multiply, we will get efficiencies of scale. Three, build new practices where a part of the revenues comes in at a higher realisation. Four, making the operations more automated and bring process efficiency in software operations.

You have comfortably doubled both your revenues and post tax earnings this year. How are you likely to do next year on a bigger base and what role will margins play?

We believe we will grow better than the industry growth rates. I do not believe that we will get under those pressures of big companies growing bigger and medium sized companies not catching up with that growth. There is more than one reason for that. I am not saying that bigger companies will not grow.

They will grow, but medium-sized companies will also catch up with them. The opportunities for medium-sized companies will grow as the market dynamics change. On a broad scale, at present, outsourcing has been done by large corporations (Fortune 100 companies) that have gone to the large vendors.

If these companies want to outsource $500 million of work, they will offer it to the top three vendors, because they will look at size and scale. But at some point in time, as the top 500 to 1,000 companies start outsourcing, mid-sized companies will gain traction.

The second factor is positioning. We are positioning ourselves as a Top tier-II company in terms of quality and growth.

What was the idea behind the acquisition of Panex Consulting?

Be it in manufacturing or in financial services, we saw relevance of Panex as a specialized SAP services provider. We believed in a front-end relationship though margins are going to be low as the work is done onsite. But about 25-30 per cent will be converted offshore in the next three years.

Does the investment by Lehman Brothers have any strategic implications?

This is not a deal of the Cummins kind. It gives us access to Lehman Brothers. It is up to us convince them of our technical capabilities as they have mature relationships already. There is no business commitment at the moment.

What is the thinking behind offering services in areas such as Very Large Scale Integration (VLSI) and information risk management?

If you look at the mindset of the CTO (Chief Technology Officer) of a company in the embedded solutions area, VLSI is on the top of his mind.

So unless we offer it, we will not have a complete offering and customers will think only about HCL or Wipro. The other factor is higher dollar realisations from some of these services.

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