In 2008, private equity firm Blackstone partnered with former Microsoft India CEO Rajiv Kaul and together they convinced the promoters of CMS Group, one of the largest IT infrastructure businesses in the country, to give up its majority stake in the company. Blackstone and Kaul carved out CMS Info Systems from CMS Group to build capabilities to tap the huge IT infrastructure and managed services potential in the country. Kaul, who is the executive vice-chairman and CEO of CMS, is eyeing over 20 per cent year on year growth for the company. In a conversation with Amit Ranjan Rai, he discusses the company’s focus and growth strategy.
What exactly was your vision and plan in late 2008 when you and Blackstone carved out CMS Info Systems from CMS Group, with the promoters, the Grover family, giving up its majority stake?
There were many things on my mind. First, I wanted to build a fantastic institution. I was very clear about establishing a big, successful and sustainable institution in the country. CMS was a good organisation, but institution-building needs a lot of other things. It has to be one that others can look up to, its brand and image are very important, and it should have solid, sustainable foundation that stays on from generation to generation.
Second, building a company that is very successful in terms of market share, growth, margins and so on. This is also critical from an investment perspective. You measure it in terms of the investments you made and the returns you get. How you increase your market share, make sure that growth is significant, how do you manage your costs and improve your margins are all critical.
Those have been the two key goals, but there are also many sub-goals. Such as when it comes to market share how do we move up the value chain, should we make some acquisitions, how do we best manage our costs…
How is the company doing today, two years after it was taken over?
CMS is today a company with about Rs 800 crore revenue. For a company focused entirely on the Indian market that’s a strong revenue. There are not many companies in the services business with such strong figures; of course, companies that do exports do have such numbers, but then we don’t do exports; we are focused on the domestic market. These numbers are significant because in India people still pay very little for services. The market is still in an evolution phase. But I am expecting this revenue to grow in the range of Rs 2,000 crore in the next four years. The market opportunities are clearly there, but we will have to execute well.
How do you plan to achieve those numbers?
It will be linked to both the market growth that will happen and CMS taking away some market share from some of its competitors. In some cases we will have to defend our market share because our share is quite large — we are No.1 in many of our businesses, and competition will try to nibble on our share. Look at the ATM market we cater to through our cash management services, it’s going through the roof. The numbers of debit cards that have been issued are very high and banks don’t have that many branches and they are going for ATMs where the customer can transact. The ATM market will grow from 60,000-70,000 to 150,000 in the next few years. Some say it could be 200,000. So I need to make sure that I retain my 40 per cent market share, and I will grow at a CAGR (compound annual growth rate) of 25 per cent. If can improve my market share, I can grow at 30 per cent CAGR. If I go for an acquisition, I will probably grow even more.
How has the growth been in the past two years? The acquisition happened in 2008; we haven’t finished our books for the last year, but the first year the growth was almost flat. For most other players in the industry, the growth declined. The first year we went for a very different strategy.
We entered the company and the slowdown hit. Customers started slashing prices, asking for discounts; and so we started thinking of letting people go. Our customers will come and tell us we want a 15 per cent price cut. Now we don’t make 15 per cent margins; how do you cope with that? Should we stop working? Initially, the reaction was very volatile. That could have meant large number of layoffs. But then we said something needs to be done because it is simply inhuman to lay off so many people.
So I took the strategy to retain my customers. I said let’s not lose any deals, there were no deals coming as no one was buying anything; let’s manage it and tide over it. Once you lose a deal, getting back to it would take three or four years. I personally went and defended customers who wanted to close because of pricing. That meant taking a cut on the prices at that time, which meant a cut on our margins. But then we worked a lot to cut out our back-office costs, overheads, real estate costs, electricity costs and so on. After the first six to nine months we knew this is the new reality and so we need to rejig the cost structure to be there. So in the first year our growth was flat but we retained our margins; we didn’t lose much on points; we would have lost about half a per cent.
When the downturn ended we were not able to give increments to people as much as others, but people have seen the loyalty of the company and so we managed to retain a lot of our good people. The customers stayed with us; with some we got lucky we got a really good hike.
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Last year, our growth in revenue terms would have been about 20 per cent — this is that what we bill, booking numbers are higher. This year we should grow from Rs 850 to, say, Rs 950-1,000 crore. My aim is to grow from Rs 850 crore to Rs 2,000 crore, and if we can grow at 25 per cent CAGR we will easily get there in four years. If we grow more may be three and a half years. With a Rs 2,000 core growth, what kind of valuation I’ll be looking at? I would like us to be a billion-dollar company in market value in the next four to five years.
CMS has several businesses which don’t seem to have too much in common. IT infrastructure management is different from cash management for banks or printing needs of organisations. Can you discuss the evolution of these businesses for CMS?
The evolution has been fairly interesting. The different businesses that we currently have are because our clients whom we were offering one particular service wanted us to handle a couple of others. So we started diversifying into seemingly unrelated businesses to offer a solution to our clients. For instance, we started taking care of the printing needs of a client we were managing IT infrastructure for and today we are the country’s largest variable data printing company. We print everything from your utility bills, bank statements, to insurance policy documents — all this goes into billions in numbers. We are the biggest organised sector player in the country for printing.
Initially the focus was one IT infrastructure management and then these businesses cropped up in the past 15-20 years. We are today also the country’s largest cash management company. We manage cash between banks to our walls to ATMs and make sure they run perfectly fine. We have a 40 per cent market share in this business. How we entered this space is because Citibank for whom we managed IT infrastructure wanted us to do it for it. We slowly grew and now we do it for almost every bank in the country.
Today, we have a variety of services and the common strategy has been that we look for clients where we can follow both a vertical and horizontal approach for growth.
What do you mean by a vertical and horizontal approach?
In any strategy there is the potential of moving up the value chain and moving across the value chain. In our three key businesses (infrastructure management, cash management and printing) we are doing both — we are moving up and moving across.
In most of the businesses, I’m taking it from a piecemeal approach to saying we will do end-to-end management. For a customer it means from running a machine to what goes into the machine, we will manage it all. So the approach has been how can I do more with the same number of clients. If a client is a bank I would like to run all its IT infrastructure, I would like to manage the cash flow between the banks and ATMs, and I would also like to handle all the printing of billing, statements and so on for the bank. I am also into training; so I would also like to provide training to the client’s employees.
At some point of time, what I’ll also try to do is segment my clients. Today, we have about 550 clients and my focus would be to make sure that there are a certain number of clients which focus on core areas that we are focused on and for whom we can work in that particular vertical, add value and grow it substantially. Plus clients with whom we can also grow horizontally by providing other lines of services that we also handle. Banks and telecom companies are good examples — they have huge IT infrastructure needs, printing and training needs. Would I like to handle things for a media company? Probably not, because that’s not a vertical I have expertise in.
Today, when I meet a telecom company CEO, the discussion often ends up in — these are the two things that we handle for you, what are the things that you think aren’t being handled efficiently and that you may hope to outsource in the next one, two or three years. And if two or three CEOs have the same thing to say, then I’ll tell my team to start doing pilots. Let’s start building some skills. Let’s do a pilot with for those companies for free or whatever so we understand what it means. Are we adding value? Does it interest us? And if one or two of these pilots are successful we’ll create new lines of businesses from there.
Where is the commonality when you talk about expanding horizontally?
Commonality comes from two-three things. One, at the end of the day, you are dealing with either the CIO or the head of operations. The buck stops there. At times, you may also be dealing with the head of procurement because he controls which vendor gets selected. We don’t need to go to anyone else. We don’t need to go to the head of marketing and so on; we just talk to the head of technology or operations, that’s where our customer and business really is.
The other commonality is that CMS has a unique strength which not many companies in India have. And that is what attracted me when we did this investment three years ago — it is CMS’ massive reach and presence in the country. Today, we have around 23,000 people working for us. We have our own offices in 120 towns and cities; and we have our people based in, say, 800 more towns. Reach is a great strength. In India, there is the last mile for everything. If you build it — it takes time and money — you have a unique asset. CMS has that unique asset.
How do you plan to grow the key business segments?
Look at cash management, there are significant ATM deployment plans by banks which are more than enough for us to grow by 20 per cent year on year for the next three years. Our ambition is more. But having said that this is complex work, I will have to be careful when I say I will start an ATM, because we are now talking about expanding in tier 4 and 5 cities and towns. So you have to have presence, offices, you need to be sure you can provide safe vaults, if a couple of crores goes missing then it could have a big impact.
Clients want to deploy more but it will be foolish to say yes if you are not be able to do a good job of it. So we are trying to slow it down to make sure we do it in a sustainable way. At the same time we are ramping and investing and saying we need to be moving faster because clients would wait for one of two months and then they will look for someone else. We are hiring a lot of senior people who can do transition management. We have ambitions to grow end-to-end and want to handle more managed services for the sector. Banks are only liking the concept.
In the printing business we have focused on the government and the public sector side. Because the telecom market, which is the largest market for us in printing, is slowing down, simply because they want to cut costs and will try to print lesser and lesser bills. It is a fact of life and so how do you grow. We have started focusing on the government side. We have done two things — one, signed up with the Department of Posts where we have set up print to mail centres which takes care of all their printing needs. We’ve set up such printing centres in Chennai and Delhi.
Two, we have won a big BSNL contract which itself will give me very strong growth. We will do all centralised printing for BSNL in the south and the east of the country. That is 60 per cent of its total volume in the country. These two alone will help me triple my revenues two years or so.
The IT services market is very fragmented in India. You have IBM, TCS and Wipro, and the rest have very small percentages of the business. Right now two-three of my competitors are quite weak. So all I want to do is to take a little share from them. By doing so I can double my market share right now. So our job is really to focus on some of their clients, which one of the competitor is weak, whose strategy for customer service is not perfect — some of the biggest names in the country are a little weak because their strategy is wrong. Their customers have been saying they are not happy with them. I tell them our biggest advantage is that we do many things that they don’t.