The Hindu Business Line : Our strategy has been to focus on products and build a services model around them

No single client of ours, except ICICI, contributes more than 1-2 per cent of our revenues. So, even if two or three clients fully cancel their contracts, it will not have any significant impact on us.

MR AMAR CHINTOPANTH, ED & CFO, 3i INFOTECH

K. Venkatasubramanian

Even as other mid-tier software companies have been drubbed on sub-prime fears, 3i Infotech appears relatively immune, thanks to product focus and low reliance on US clients. Mr Amar Chintopanth , ED & CFO, spoke to Business Line, on how 3i differentiates itself from other mid-tier IT companies.

Excerpts for the interview:

Most mid-tier players in the Indian IT sector started out as players focussed on 1 or 2 verticals. Now most of them operate in 4 to 5 verticals. How does 3i view its verticals-mix?

There are two ways of looking at this. One is if there is a set of common services that are provided across verticals such as offshore delivery centre, software coding, etc. Then you can have many verticals, with processes that are common across these verticals. We are focussed on software products.

When you are in the products space, it is very important to identify which business you are going to be in. For example, a banking products company is going to find it very difficult to get into, say, healthcare or telecom segments.

Our strategy has been to focus on products to penetrate into clients and then build a services model around them. Coming to the Banking and Financial Services Industry (BFSI), it is not just banking; it includes insurance and capital markets and we have specific products for each of these segments. Because of the nature of the work we are doing, it is not general purpose which can be used across many verticals.

Therefore it becomes necessary for us to focus on a few areas. Our products business is distributed as follows: 15 per cent banking, 15 per cent capital markets and 15 per cent insurance.

Coming to services, it is again divided into ADM (application development and maintenance), BPO, managed services and e-governance. ADM is about 25 per cent of the revenues. There it is not BFSI alone; we are concentrating on horizontals such as security consulting, enterprise application and integration, and so on. BPO, of course, is all banking. IT managed services again can go across verticals. So, it is mainly based on the business model that we work in.

If one looks at the SWAN (State-Wide Area Network) deals or other infrastructure deals, is your not being a hardware integrated player an impediment to winning deals?

I don’t think not being hardware integrated is an impediment. As of now, we are partners with most OEMs. More often than not, OEMs themselves want to partner us for large deals. On the price front, you definitely get a good deal from these OEMs anyway. We are systems integrators, but we have restricted ourselves to the services component alone. For the hardware there is the partner. We bid for deals as a consortium, with us being in the lead.

3i says it doesn’t follow the traditional onsite/offshore model. Could you elaborate on that?

If you look at the structure of the company, we have five major geographies. What is sold in a particular geography is determined by what sells most in that geography with minimum investment. If you look at the business segments, the products business revenue stream has three components — licence revenue, implementation and annual maintenance.

Product development is all done offshore. For licence revenues, there is no question of an onsite/offshore mix. Implementation is almost entirely onsite or onshore that is near the client. Annual maintenance is a revenue stream where you have to put in effort only when there is a support call, which can be offshore.

Coming to services, if you leave out the ADM space, if you look at BPO, managed services and e-governance, these are all India-specific. Only in 25 per cent of ADM, we have a break-up of onsite/offshore. Only 50 per cent of the ADM revenues comes from the US, the rest comes from other geographies, including India. Of that 50 per cent, onsite-offshore is 55 per cent. That is why the structure is different. When we talk of billing rates, it is specific to 50 per cent of 25 per cent of total revenues.

In light of the appreciating rupee and factors such as wage inflation, have you been able to increase billing rates?

On the products side, the value that you get for your product depends on the value that the client is able to see in the product, in enhancing his business. From our side, it is based on the number of users. For example, an insurance product will be the same, but one company may have five branches, another may have 500 branches. So the realisations have got no relation with the cost.

On the implementation side, yes, there are software engineers, and to some extent there could be cost pressures. But on the product profitability you will have to look at the margins from both the licensing and implementation sides. Coming to the services aspect, our BPO is not voice intensive, rather it is transaction-processing intensive. This means that we do not have the kind of employee turnover and cost pressures of a voice-based business.

In the ADM space, yes there is cost pressure. But traditionally, we have had a sovereign cost increase of 10-12 per cent, which we have been able to recover in our sales. Where cost actually impacts us is on the rentals, utilities, etc. In India, that is the area of cost escalation for the last couple of years.

How have you been affected by the sub-prime problem, and are there any signals of a cut in IT budgets of companies?

Till now, we have not seen any sign of that. Sub-prime so far has been in the US. Our exposure to the banking vertical in the US is negligible. In the US, our products cater mainly to the insurance sector and ERP as a framework that is more of a service. The only exposure on the products side in the US is from the J&B acquisition. That is also on the cheque payment side, which is a more day-to-day operation. So overall the impact has been negligible.

Another way of looking at it is in terms of client concentration. No single client of ours, except ICICI, contributes more than 1-2 per cent of our revenues. You have got ICICI, which contributes 14 per cent. Our top five clients, ex-ICICI, globally contribute only 8 per cent of our revenues. Even if two or three clients fully cancel their contracts, let alone a slowdown, it will not have any significant impact on us. Our capital markets exposure is mainly in western Europe. There too it is an asset management software that is used by brokerage houses, where our products run their core operations. So there, we have not had any impact.

Have your acquisitions in the last couple of years been value accretive?

I will first take Rhyme Systems. J&B is a recent acquisition and, therefore, it is too early to comment. But the Rhyme example is probably applicable to J&B also.

When we acquired Rhyme Systems, we were sure that the rate of growth of Rhyme in the UK could not be matched by the growth rates of 3i Infotech in other geographies. But we went ahead and did the acquisition because it would give us a very good presence in the UK market with a good brand name. It allows you to take your other products to the UK. It allows you to take Rhyme’s products to other markets.

There are few other important aspects to it. All of Rhyme’s product development was taking place in the UK. So to the extent it could be off-shored, which could improve the margins of the group as a whole. Rhyme also has some very good clients, so we were looking at getting some work from them that could be off-shored.

Is there a cause for concern because of the fact that all large deals are going to fully integrated top tier players?

If you look at the IT sector, there is clear segmentation between large-, mid- and small-tier players. The top 4-5 players clearly have a lead. Large integrated deals continue to go to them due to their capabilities in terms of scalability, having a global network, etc. That is clearly creating pressure on us. The deals that could have come to mid-tier pure-play services companies is being taken away by these guys because of their capabilities and offerings. We realised this and that is why we are not into any large integrated deals as of now on a global basis.

Can the industry move towards outcome-based billing?

Absolutely. Even from the client side they will want to know what value add has happened. In a products business you are always in fixed-price mode. Time and material (T&M) is only in the ADM space for us. Fixed price constitutes about 70 per cent of our revenues. I think T&M will slowly be phased out. Fixed price contracts are a better way to realise margins, provided you know how to manage costs and projects. Otherwise every project will have an overrun.

Do you see any consolidation happening in the mid tier IT segment?

It could happen either between mid-tier companies or large players could takeover mid- or small-tier companies.

How far are you positioned in terms of delivering services as SaaS and how much have you adopted SOA?

In India, in products, purely selling licence is not a viable proposition. We have products that can run the core operations. So, we definitely have a roadmap to making this available more as a SaaS. It could scale up and give benefits to clients. There is trend, but how long it will take depends on client confidence.

There is lot of demand from clients on SOA. Indian players are getting ready but are not there in a big way.

Are you disadvantaged by the possible removal of the STPI scheme by march next year?

We have subsidiaries in each of the geographies that we operate in. There is not necessarily an incentive for us to bring our profits back into India because the operations are not India based, going outside. Because of the significant domestic presence, there is STPI, but is not a very used vehicle for us for tax-planning. In India, we are at MAT. At present our total tax rate is 8 per cent. We may move to an SEZ, but it is not critical. We are not going to be hit from a zero to 30 per cent tax rate!