Advertisement

  • News
  • Columns
  • Interviews
  • BW Communities
  • Events
  • BW TV
  • Subscribe to Print
  • Editorial Calendar 19-20
BW Businessworld

Three Men And Their IT Journey

Photo Credit :

Vineet Nayyar, vice-chairman of Tech Mahindra, says he remembers "the moment" like it was yesterday. On 7 January 2009, he was in his office at the Pune headquarters of Tech Mahindra when an investment banker called up and insisted that he switch on his television set immediately. News was breaking of Satyam Computer Services founder Byrraju Ramalinga Raju's resignation and his self-confessed Rs 7,800 crore fraud in the company's accounts. Even as he watched the events unfold, an idea began germinating in Nayyar's mind.

Weeks later, at a dinner with Mahindra Group vice-chairman Anand Mahindra at the corporate headquarters in Worli, Mumbai, Nayyar broached the idea of making a bid for Satyam. "Anand laughed. And his first reaction was, ‘Vineet, did you have one too many (drinks) tonight?'" It was, after all, a tainted organisation embroiled in a legal tangle with an uncertain future and inflated accounts.  However, Nayyar recalls, in less than 10 minutes Anand was not only on board, but began asking some tough questions, already planning a strategy.

Some deft moves and calculated risks later, the Mahindra group bagged Satyam in April 2009 through a government-coordinated sale for a price tag of Rs 1,757 crore — giving it a 31 per cent stake — and renamed it Mahindra Satyam. "We knew that Satyam had real business, real clients... and expertise in certain areas, though nobody knew to what extent the numbers were incorrect," says C.P. Gurnani, managing director and chief executive officer of Mahindra Satyam.

In fiscal 2011-12, following an excruciating integration exercise and restatement of accounts that shrank Satyam to about half its size, the company reported it was in the black with a net profit of Rs 1,306 crore. Soon enough, M&M announced a merger of the two listed firms at two shares of Tech Mahindra for every 17 shares of Mahindra Satyam.













REVENUES
MAHINDRA IT
$2.3 BN

INFOSYS
$7 BN

TCS
$10.17 BN

The combined entity will more than double Tech Mahindra's revenues of Rs 5,488 crore to Rs 11,884 crore ($2.3 billion at current rates), making it the fifth largest IT services company in India behind the $10.17-billion TCS, $7-billion Infosys, $5.9-billion Wipro (IT business) and the $4.1-billion HCL Technologies. Mind you, this pecking order excludes the $6.8 billion Cognizant Technology Solutions which, though headquartered in New Jersey, US, has about 75 per cent of its employees in India. The new entity — likely to be named either Mahindra IT Services or Mahindra Consultancy Services — will employ 75,000 people in 84 countries and  have cash reserves of Rs 3,300 crore.

But what kind of an entity will it be? Will it have the wherewithal to overtake any of the Top 5, or will it remain the leader of the second rung that includes the $1-billion iGate-Patni, the $384-million MindTree and the $310-million Hexaware, among others? To start with, parent M&M expects Mahindra IT (let's call it that for the moment) to double its size in three years. That is reasonable, considering Indian IT's big three — TCS, Infosys and Wipro — have grown nine times since 2003. But only just.

The global economic scenario has been prickly since the great US banking crash of 2007-08. While it has always managed to stage a recovery within two years of a crash since 1945, the economy is struggling even four years after the recession this time around. In such a macroeconomic scenario, the IT services pie has remained stagnant at around $850 billion for the past three years. This year, too, it is expected to either remain flat or grow at a tepid 2-odd per cent. Where does that leave Mahindra IT? "While the established model will continue to be there, the next wave of growth will come from developing innovative solutions," says Anand Mahindra.



What It's Up Against

The CEO of a rival IT major says, "...doubling a company in three years in the current environment is not tough, it is impossible. The Indian IT industry will grow this year by 10 per cent. Mahindras have done a good job of turning around Satyam... but the targets they have are not realistic." A report released in June by Macquarie Equities Research on Indian IT services says "sub-par growth" in US and world GDP is expected to be over 12-24 months. The report, Trouble in Paradise, adds: "This, coupled with the structural pain that we are seeing in the BFSI (banking, financial services and insurance) vertical, implies that visibility on double-digit top-line growth for Indian IT vendors is cloudy. PE multiples (will) remain below historical averages seen in 2003-08."

Such a scenario means Mahindra IT's growth will have to largely come from displacing an incumbent rather than getting a bigger share of growth. "In the past 6-7 years, we grew the revenue 10 times at Tech Mahindra. From a single client, British Telecom (BT), Tech Mahindra today has 130 clients across the globe," says Nayyar. "From just IT services, we now provide everything in telecom. There is not a single telecom project for which we do not get RFP (request for proposal). We compete with IBM, Huawei and TCS and win against the best."

break-page-break
Mahindra IT needs to outpace its peers. But historically Tech Mahindra, a smaller company compared to the Top 5, has grown slower than its peers. Its 7-year compound annual growth rate (CAGR) of 27.6 per cent is slower than the fast-growing Cognizant's 39.8 per cent, HP-owned MphasiS's 29.7 per cent and HCL Tech's 28.6 per cent. Its growth is only slightly better than the far larger TCS, Infosys and Wipro's 7-year CAGR of 24.2 per cent, 24.2 per cent and 22.5 per cent, respectively. The combined entity has a 7-year CAGR of 41.9 per cent, which while being even higher than Cognizant's, includes several years of what are believed to be Satyam's inflated numbers under Raju.

The M&A Route
With all its peers nearly as aggressive as it is, Mahindra IT may need to take the inorganic route of mergers and acquisitions. Remember, besides the Rs 3,300 crore post-merger cash pile, the group has parked 204 million treasury shares of the combined entity (equivalent to 10.4 per cent equity) in a trust to be used in the event of an M&A opportunity.

M&As, though, require a lot more than just cash. They need vision, guts and risk-taking ability. All the moneybags of Indian IT have so far displayed none of these traits, with the exception of minor acquisitions off and on. The leader, TCS, currently sits on a cash pile of Rs 6,780 crore, Infosys on Rs 20,072 crore and Wipro on Rs 7,767 crore. Even HCL has cash reserves of Rs 2,371 crore. Infosys's recently appointed chairman, K.V. Kamath, is goading its management into making some bold acquisitions to accelerate growth.

You can argue that so far the IT majors did not  need M&As to grow. Their organic growth was itself proving tough to handle. A large acquisition and its painful integration would have been another headache. But the pause in the global economy may necessitate some courageous steps. "Over the past two months, global macroeconomic conditions have not showed any signs of improvement... clients of Indian IT companies will rein in their tech spending for FY2013. It is prudent to tone down the bullish demand stance until more clarity emerges," notes the Macquarie report.

Fortunately for Mahindra IT, in recent times, M&M has gone on a buying spree around the world and has set up a core group that examines global M&A opportunities. It can always bank upon the parent to pull off a bold acquisition.

Strength In Unity
The combination's biggest advantage lies in the operational synergies it will derive from economies of scale, standard processes and elimination of duplicate departments. The size of the combined balance sheet will also make it eligible to bid for large sourcing contracts that require a strong balance sheet as a pre-condition to bidding. One way to leverage the combined entity is by cross-selling more services to the existing client base (most IT firms report 95 to 99 per cent of revenues from repeat business). Sujit Baksi, president of corporate affairs and business services of the group, says the ‘joint go to market strategy' of the sales teams is already yielding results. For instance, in security services, capabilities and competence existed in Tech Mahindra and these solutions have now been cross-sold to enterprise customers of Mahindra Satyam. Similarly, the ERP (enterprise resource planning) and business intelligence solutions of Satyam have been sold to Tech Mahindra's telecom customers AT&T and BT.

Its existing clientele mainly comprises of legacy businesses such as enterprise business solutions and infrastructure engineering solutions. Gurnani says they have identified five key horizontals for growth: networks, mobility, analytics, cloud and security (NMACS). These are emerging areas. For instance, in cloud computing where even large organisations collaborate with specialist firms, "we will compete and co-opt other players," says Gurnani.



"The combined firm has deep strengths in manufacturing, telecom and engineering services, which they can leverage to deliver innovative solutions," says Hansa Iyengar, senior analyst with Ovum, an outsourcing and offshoring research and advisory firm. "Over-dependence on developed markets is a cause for concern, but in Latin America, China, Japan, West Asia and India, they can grow faster."

Even while the effort is on to reduce over-dependence on certain clients and geographies, Vikram Nair who heads the European operations (about $1 billion of the company's $2.3 billion revenues, including the $450 million BT account) says M&M group's presence in a large number of areas is very helpful. "We eat our own dog food, before we deploy it to our customers," he says. Karthikeyan Natarajan, who heads the company's engineering services division, says he is well placed to leverage the defence offsets opportunity: "For most of the aerospace, engineering, aviation and defence companies, the first port of call in the Indian market is M&M."

break-page-break
A Future In Verticals...
But as Mahindra IT embarks on the growth journey, it is set to encounter some serious headwinds. The fiercest of them would be in its core area of strength: telecom. The combined entity will still earn 47 per cent of its revenues from the vertical, which itself is facing a slowdown. Mahindra IT's second strongest vertical Manufacturing, which contributes 17 per cent to the combined revenues, has also suffered the most since the US and European recession as industrial activity came to a standstill.

The company's telecom growth will also depend on how its re-tendering for its top client — BT — fares. The process is likely to be completed this year. Though it has retained its market share in projects negotiated so far, BT's driving a hard bargain for discounts that could hit margins. "We note that Tech Mahindra's margins (gross) have already fallen sharply by 1,100 bps since March 2009 and will see further downward resets post the re-tendering... albeit a weak currency will offset some of these headwinds," notes an Emkay Research report. "Operation metrics (were) weak with revenue from Top 5 and Top 10 clients declining by 4 per cent quarter-on-quarter (q-o-q) each (Top 2-5 client revenues were flat q-o-q ). Discussions with (company) management indicate revenue growth at a major North American telco was also tepid, impacted by the lower number of billing days," it adds.

The world's biggest industry vertical for IT outsourcing happens to be BFSI, with a share of 35 per cent of the $850 billion industry. Analysts point out that Satyam is an also-ran in the crucial BFSI vertical, though it works with eight of the top wholesale bank brands, four of the top 10 retail companies and three of the Top 5 credit card issuers.

Most large players such as TCS, Infosys and Wipro earn between a quarter to a third of their revenues from this segment, whereas Mahindra IT gets a mere 11 per cent. Its BFSI revenues total $200 million against Infosys's $2.8 billion. Rivals say they have not encountered Mahindra Satyam in any major BFSI deal in the recent past. "There are no quick fixes, but I am confident that we will grow faster in this market," says Gurnani (see interview on pages 32-33).











"We Want To Double  Revenues"










(BW Pic By Bivash Banerjee)

Chander Prakash Gurnani, who will be the CEO of the new merged entity, spoke to BW about the integration process and the future plans for the firm. Excerpts:


What are your aspirations for the new merged entity?
Once the complete merger process is through, the new company will have around $2.3 billion in revenues, around 75,000 employees, marquee customers and a strong portfolio of solutions.This is a merger of equals. Over the past seven years, if you take the cumulative rate of growth of Tech Mahindra and Mahindra Satyam together, we have grown above all our peers.

Our ambition is to double the revenues to $5 billion by 2015. Given the current market conditions, doubling revenues in three years will be challenging. But we have a strategy in place. Globally, we are one of the largest players in telecom. Mahindra Satyam brings world-class expertise in enterprise solutions, manufacturing and engineering solutions. In areas such as big data, mobility, platform-based business process outsourcing, security and engineering services, we want to be among the Top 5 brands in the world, and we will achieve this through competency building and innovation. We want to grow our share of revenues coming from the BFSI segment.

What have been the integration challenges?
We have been engaged for three years... being part of M&M Group. Over the past couple of quarters, we have closely examined and worked on how to pull this off in a smooth and seamless manner, with little impact on associates (employees) and none on customers. We have set up a team to jointly work on this, so that we take best practices from each company and incorporate them into the new entity.

All the restructuring that was required to be done at Satyam has already been done. Facilities have been consolidated, accounting and revenue recognition processes streamlined to the highest standards of the M&M Group. Except for a handful of people, that too in shared services such as accounting and facilities management, there will be no impact on the bulk of our associates, and even there, most of them will be redeployed. We are a growing company looking to attract and retain the best of talent. The message I want to underscore is that there is a new old kid on the block with a proven track record, and we are hungry for growth.


One big hope is an expected $22-37 billion outsourcing opportunity arising out of the US Health Care and Education Reconciliation Act of 2010, popularly known as Obamacare for the backing the Bill got from the US President. However, with just 3 per cent of Mahindra IT's revenues coming from the healthcare and lifesciences verticals, the company's experience in the sector is limited and may be a constraint in grabbing contracts. The business will depend on whether the US allows health records of citizens to be stored or processed outside its boundaries.

Gurnani says the company has invested aggressively in building platform-based and IP-led solutions. "The proof of our strategy will be in the execution over the next few years," he says confidently.

Innovation: The Next Wave
Mahindra IT will also have to cope with a serious mid-life crisis in Indian IT. Clearly, Version 1 of Indian IT — comprising large offshore centres doing low-end technology work — has become a commodity business facing tremendous competition and cost pressure from emerging economies. It will continue to make money and still be reasonably profitable, but it will not bring in complex technology contracts worth hundreds of millions of dollars. Hence, in setting his expectations from the combined entity, Anand Mahindra has made his intentions very clear: Mahindra IT must innovate far more than its rivals.

The group has made a small beginning in that direction by setting up two kinds of funds. First, an internal fund for ‘intrapreneurship'. Manish Mehta, chief vertical solutions officer of Mahindra Satyam, says the company has no specified corpus for now, but it will be augmented on an ongoing basis. It aims to encourage employees who wish to set up their own company, to continue to be part of the group, by providing them funding, mentoring and market opportunities. The group expects this to be a key tool in attrition reduction.

break-page-break
The second fund is an ‘external focused' one. It has a corpus of $50 million. It was set up by Mahindra Satyam in February 2012 with SBI Holdings (part of the Softbank Investment Group of Japan), and will invest in promising information and communications technology companies. Though various proposals are being examined in this connection, an investment is still to be finalised.

Project Symphony
By itself, the merged entity will kick off with one major advantage: there is practically no overlap in the businesses of Tech Mahindra and Mahindra Satyam. While Tech Mahindra earned 96 per cent of its revenues from telecom, Mahindra Satyam was focused on manufacturing, BFSI, healthcare, engineering services, media and entertainment. Even in terms of size, it is a merger of near equals (Tech Mahindra's revenues add up to $1.1 billion and Mahindra Satyam's to $1.2 billion).

However, there are integration challenges —  though the company wants to downplay them. The 40,000 Tech Mahindra employees are relatively better paid, compared to the 34,000 employees of Mahindra Satyam. Perks ranging from on-site allowances to the number of days of leave differ. A Tech Mahindra employee says, "After spending a specified period abroad, when one returns to India, one gets a $1,800 allowance, which is being done away with. We have had this for years. Why should we give it up now?"

Sujitha Karnad, who currently heads HR for Tech Mahindra, says that since there was a long courtship before the marriage, the companies are addressing all these concerns. "In any union, there will be some friction. Our effort is to minimise, if not completely eliminate, it. We have adopted a greater degree of transparency and enhanced communication."

The integration process — internally called Project Symphony — is drawing up a blue book of best practices from both companies. Senior vice-president Mahesh Nagaraj, who is leading the integration effort, says the concerns are being addressed through surveys and feedback mechanisms. Aniruddha Bhosale, research analyst at Deutsche Bank's Securities division, in a report says that the new company is trading at a discount of 45 per cent to HCL Technologies, the No. 4 player. "...the valuation discount will narrow. While for Tech Mahindra shareholders, the merger will be earnings per share-dilutive initially, it entails long-term positives."

As the merger takes shape, the combined entity finds itself in a delicate stage of its evolution. And while it tackles the growth and profitability challenges, the management will have to keep an eye on the legal tangle it continues to face owing to the Satyam fraud. The Income Tax Department, for instance, has slapped a Rs 616-crore claim against Satyam (with the matter in court, the interest amount keeps rising).

The Raju family claims Satyam owes them Rs 1,230 crore (total dues, with penal interest, according to Raju's lawyer Niranjan Reddy, are over Rs 2,000 crore). IL&FS Engineering (formerly Maytas Engineering) has sought Rs 650 crore towards money it says had been lent to Satyam when Raju was the chairman. Mahindra Satyam, on its part, is claiming Rs 275 crore from the previous management and its auditor, PricewaterhouseCoopers.



Meanwhile, the group has had some success with international claims. Mahindra Satyam paid $125 million to settle a class action suit in the US and another $70 million to settle UK-based Upaid Systems' claims for allegedly providing wrong documents resulting in it losing a patents case. The trick is in ensuring challenges do not bog down Mahindra IT's Top 3 men who have embarked on the journey of a lifetime. For Gurnani, a chemical engineer by training, it's time to get the integration chemistry right.

venkatesha(dot)babu (at)abp (dot)in

(This story was published in Businessworld Issue Dated 16-07-2012)