NIIT Technologies might not come across as an exciting company in the Indian software industry today, an emerging star like a young Cognizant or a Mindtree. Yet, its evolution in just the last three years could make it an example of how a software company successfully adapts with changing times.
In 2009, the company found itself, like many others, confronting a worldwide recession. It had also incurred huge hedging losses of around Rs 60 crore. Yet, its most difficult decision was something that confronts almost every software player in India today — namely, how to migrate from a linear model that involves growing revenue in direct proportion to headcount to something higher up on the value chain.
Post-2009, NIIT Tech decided to adopt a strategy of ‘focus and differentiate’. This meant undertaking three transformational steps — focusing on just a few verticals and becoming a specialist in those segments, chasing geographic diversification and thirdly, investing in future growth which includes sales and marketing as well as strategic acquisitions. At the rate it’s going, the goal of eventually becoming one of Indian IT’s heavy hitters may not be wildly as improbable as it may have been three years ago.
| STEPPING ON THE GAS The journey from FY09 to FY12 | ||||
| FY 2009 | FY 2010 | FY 2011 | FY 2012 | |
| Net profit (Rs crore) | 114.8 | 126.4 | 182.2 | 197.2 |
| Yoy growth (%) | -15.1 | 10.0 | 44.2 | 8.2 |
| Headcount | 4238 | 4476 | 5806 | 7362 |
| Ebitda (Rs crore) | 176.4 | 188.8 | 240.4 | 268.4 |
| Ebitda margins (%) | 18.0 | 20.7 | 19.5 | 17.0 |
| Ratio between linear & non-linear businesses | 74:26 | 72:28 | 73:27 | 75:25 |
| Revenue (Rs crore) | 979.9 | 913.7 | 1232.3 | 1576.5 |
| YoY growth (%) | 4.1 | -6.8 | 34.9 | 27.9 |
| Source: industry | ||||
“One of the key elements has been to transform itself from a generic service provider to a specialised domain-focused player,” says Vishal Jajoo, senior research analyst from Nirmal Bang. NIIT Technologies began to focus on select verticals such as travel, insurance, banking and financial services and started acquiring Intellectual Property (IP) assets and niche capabilities in those verticals. “We believed in being the best (in select verticals), and being big enough in contrast to being the biggest and good enough," said Arvind Thakur, CEO NIIT Technologies. The travel, as well as insurance and financial services verticals have been contributing 90 per cent of the company’s incremental growth in the past few quarters.
Entering new territories
The diversification into newer geographies has also helped. In 2008-09 , the company used to get 50 per cent revenues from Europe, West Asia and Africa (EMEA). Now, NIIT Tech has a balanced mix. It gets 37 per cent revenues from the US, 37 per cent from EMEA, 13 per cent from Asia Pacific and rest from other geographies including India. As Arvind Mehrotra, President Asia Pacific, NIIT Technologies puts it, “The way we approach an acquisition has changed. We are looking at acquisitions to give us entry into newer geographies or areas of operations.”
“Moreover, 2009 made us look at the Indian market. In that space we signed a large deal with the Border Security Force (BSF) for its “Intranet Prahari” project. The deal not only helped us get inroads into future government deals but also catapult us into the large deal league,” says Mehrotra.
NIIT Technologies had bagged this Rs 229-crore project last year. Under the seven-year project, network connectivity has been extended up to BSF’s battalion level and it has also set up a data centre and disaster recovery centres in different seismic zones.
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In some sectors, NIIT Technologies has developed IP assets to offer platform-based services, and where it does not have them, it has elected to partner with the owners of those IP assets.
For example, NIIT Technologies has deployed cargo-handling systems across some major airports in the Asia Pacific region (Beijing, Taiwan and Hong Kong), in partnership with Singapore Airport Terminal Services (SATS). In partnership with SATS, it is now taking these solutions to other markets as well. NIIT Tech in July, 2011, had signed an $85-million partnership agreement with Georgia-based Morris Communications. Under the terms of the agreement, the media company transferred its key assets including IT infrastructure, people and applications landscape to NIIT Technologies. This JV with Morris started realising revenues from September 2011 and has contributed about Rs 243 million to the revenues in Q3FY12. During Q4, the JV realised revenues of Rs 245 million.
Sales and marketing push
Besides deepening its vertical focus, the company also enhanced its focus on the sales and marketing team. The company hired seasoned marketing professional, Deepak Khosla, as the global head of sales and marketing last year, with the objective to sharpen its sales focus.
Khosla, who has years of marketing experience with Patni Computers Systems (now iGATE Patni), HCL and others, realised that mining existing clients is as important as acquiring new one. Apart from various other initiatives, Khosla focussed on customised marketing initiatives or account-based marketing for select clients. This paid off as business from the top 10 clients grew by 39 per cent within a year.
As part of its strategy to invest in future growth, NIIT Technologies increased its spend on sales and marketing considerably in the last three years. It spends 1.5 per cent of its revenues on sales and marketing, which is much higher than its other mid-cap peers. While the headcount pyramid remained flat, the company increased its international sales team by 20 per cent last year.
Acquisitions
NIIT Tech has also used acquisitions to help it accelerate from a four per cent YoY revenue growth in 2009, to a 28 per cent YoY revenue growth in 2012. In August 2011, it acquired Spanish software services firm Proyecta Sistemas de Informacion SA for $7 million to strengthen its capability in the travel vertical. Proyecta sharply focuses on two segments: Travel and financial services. Almost 68 per cent of its revenues come from the travel vertical.
Now, the company says the focus on growth, especially the inorganic kind, will be ratcheted up a few notches. With an executable order book of $243 million, mid-cap IT firm NIIT Technologies is now setting its eyes on larger deals. The company has formed a team called the 'Elephant hunters', who would be identifying and pursuing significant transformational opportunities.
“We will be actively pursuing large deals upwards of $25 million and have already put a team in place to identify such deals; $25 million is our sweet spot as the number of $100 million deals has remained static post 2009," says CEO Thakur.
Going forward, the company has already identified key areas that will add specificity to its growth — mobility, analytics and cloud computing.
“We have three clear horizons. The first, is the current revenue generators like application development and others the second, are the ones where we have made investments in 2009 and are now paying off and the third is the area where we are investing now, which includes cloud computing, analytics and mobility," said Thakur.
So, what does the future hold for NIIT Technologies? “The new deal additions and acquisitions may stress the balance sheet of the company. It has a cash reserve of $40 million and an order book of $243 million. Its increased focus on government deals is good, but government deals usually locks in a lot of cash, which is a concern," said a senior research analyst with a Mumbai-based brokerage firm.
Does this mean they can’t aspire towards the big leagues? “Whether NIIT Technologies can catapult itself into the billion-dollar bracket would largely depend on its capabilities to develop expertise in the upcoming areas such as cloud, mobility and business analytics. The last phase of growth came from increase in the $25-100 million deals but the next phase of growth would be driven by expertise in these specific areas," added the analyst.