Hyderabad-based Infotech Enterprises Limited is unfazed with US-based Carlyle’s Group, the third largest private equity firm with $159 billion in assets under management globally, recently buying close to 10 per cent stake in it from the open market for around Rs 210 crore. The mid-sized, 10,000-employee engineering and geographic information services (GIS) company’s chairman and managing director BNR Mohan Reddy, in fact, says it a great story for them and they are working with Carlyle. In an interview, Reddy shares with K Rajani Kanth the company’s focus on new geographies, risk mitigation plans and its growth trajectory. Edited excerpts:
What’s your take on Carlyle buying stake in Infotech?
We did not want to dilute our stake in the company any longer given that we also have money in the company today. So, Carlyle decided to go and do a secondary market operation (picking up the stock from the stock markets). We, however, were aware of it that they were trying to do this. We think Carlyle is a great investor because it has done an enormous amount of investments in the manufacturing sector. And, manufacturing is a key focus for us. So, we are now talking to them in trying to get introduced to some of their investee companies, which typically are large in size. The result (stake buy) is a great story for us and we are working with them. I see a win-win situation for both of us.
The downturn in the US and with Europe bleeding, what’s the scenario now?
The matured western markets today do have certain amount of uncertainty around the macro-economic level. Europe is little more visible to the eye compared to the US, but it is no different at all. There are aberrations at this point but there has been no major downturn currently .. that’s what we think.
So, are you looking at new geographies for growth?
It’s now three years since we made investments in Japan and we bled. We lost at least $1 million every year. It is turning around now. We think China is a market which cannot be ignored because a number of our customers have presence in China and want us to do some more work there. APAC is a very strong market for us. It has become so substantial that for the first time, this year, it is tending towards 11 per cent contribution to our revenues, as against eight per cent last year. And, it is a good reflection to the extent that for the first time we have started doing a forward cover of Australian dollar since last quarter, given the uncertainty and volatility of the foreign exchange markets. Earlier, we were covering only dollar, pound and euro. Africa is a new geography. There are certain opportunities that we are working on, and once they fructify we will start looking at opening offices there.
With fluctuating currencies, any risk mitigation plans?
We have got a consistent policy. About 70 per cent of our net forex gains are covered for the next 12 months. That’s a very prudent policy because our investments are being drawn based on that. So long as we are a profitable company, it doesn’t matter if something goes up or down. We are not specialists in foreign currency but are specialists in business. So, we will focus on our business and make sure we don’t take too much risk.
What would be the projected contribution of engineering services to revenues this year?
Last year, we were at about $325 million in terms of our revenue profile, with engineering accounting for 75 per cent. This year, I believe, we would do $200-220 million from engineering (aerospace, heavy equipment, transportation and hitech consumer electronics), $100 million from utilities and telecommunications and $45-50 million from content, taking our revenues to $380-400 million.
Are there any pricing pressures?
At least from our company’s perspective, we are not finding any major pressures on the pricing part. We are delivering higher productivity and so our customer stickiness is very high. Most of our customers, if not all of them, are definitely honouring price increases, though it may not be to the level that they have originally committed. In the July investor update, we also said that we have a price increase of 0.1 per cent compared to the previous quarter.
Infotech had earlier said it proposed to acquire one European company (for sub-$40 million). Has that been kept on the back burner?
We are still negotiating and are re-assessing the requirements at this juncture. We are in a very tricky market. The European economies and stock markets are not doing well. The result is, the valuations are coming down. Now, typically, an entrepreneur would say that the markets are very peripheral and even if they go up or come down his valuations remains the same. That’s their stance. Many say that the stock exchanges are an indication of the health of an economy. If they are not doing well, it means some readjustment has to happen. There are some government-funded programmes in European countries, and if they will disappear, will these companies (targets) be as attractive as they are? We are still trying to talk, but we don’t think it will happen in the next couple of months.
The company has cash piles of Rs 480 crore. Do you plan to go for more acquisitions, in some other geography?
Acquisition is a growth strategy for the company. But we are not in a great hurry. People are yelling at us saying why do we require Rs 480 crore of cash. But you never know what happens in the future. And, we need to satisfy our investors. We have increased our dividend payout ratio. In the past, we used to payout approximately 10 per cent of our dividends. In the last year, we upped it to 20 per cent. We need that cash at this point to build a great company, which will last forever.
