'BPO is our core competency'

SMART TALK/Manish Modi, CEO & MD, Datamatics Tech

Mumbai-based Datamatics Technologies provides back-office operations, financial accounting and transaction processing. The company has filed a red-herring draft prospectus with Sebi for its IPO of 1.03 crore equity shares of Rs 5 each.

It plans a listing in mid-April and claims that its positioning as a pure play BPO will distinguish its offering from other IPOs.

It posted a net profit of Rs 21.43 crore on a total income of Rs 72.73 crore for the nine-month period ended December 31, 2003, and a net of Rs 15.53 crore on a total income of Rs 60.43 crore for the fiscal ended March 31, 2003.

The Smart Investor spoke to Manish Modi, CEO and managing director, about the company and its potential.

When is the issue expected to hit the markets? What will be the issue size?

We have filed a draft prospectus and the issue is expected to hit the markets in the early half of April. We want to dilute our capital by just over 25 per cent.

The current capital of the company is about 3 crore shares (face value of Rs 5) while the paid-up capital is about Rs 15 crore. Post-issue, we will have 4 crore shares and the capital will be about Rs 20 crore.

The price of the issue, which represents 25.39 per cent of the fully diluted post-issue paid-up equity capital of the company, will be decided through a book-building process.

Why did you take so long to list?

We are self sufficient and have been growing at a fairly decent rate in the past and continue to do so. In fact, Datamatics Technologies has grown at more than 40 per cent compounded over the last five years.

We are going public for main reasons. Firstly, there is a need to get exposure in the market place. Secondly, we need to get funds for our growth strategy.

We made two acquisitions last year. Our strategy is to grow both organically as well as inorganically. Finally, the listing will enable us to provide stock options to our employees.

What are your core operations?

Our core operations include back-office operations, financial accounting and transaction processing. Unlike a typical BPO player, we don't have call-centre operations. The billing that we charge our customers is on a per-unit-delivered basis. The unit may involve a cheque, it may be a document processed or a claim. This is one major difference between us and other Indian companies.

Don't the Chinese have an advantage when it comes to the non-voice component in terms of cheaper cost of labour?

The answer is yes and no, depending on what they do.

Let me explain. When it comes to plain data entry or some retrospective conversion, China does have an advantage. Suppose there are 100,000 pages of legal material to be typed in, sure China could probably do it cheaper.

But if there is some value additions required to those 100,000 pages, you have to create a database or a document management solution. That is where Indian companies are at an advantage.

How has the growth in revenues and profits been in the last three years? How dependant is the company on its major clients?

We have been consistently posting good profits. Last year we had profits of Rs 15.53 crore on revenues of Rs 60.43 crore. The year prior to that, our profits were Rs 12.5 crore on revenues of Rs 42 crore. In 2001, we had profits of Rs 10 crore on revenues of Rs 28 crore.

Our clients include five of the top 25 Fortune 100 companies. We have been operating at net margins of about 30 per cent. Last year, the top five clients contributed 49 per cent to the total revenues while the contribution from the top 10 clients was 62 per cent.

How will the issue proceeds be used?

In terms of inorganic growth, we are looking at acquisitions in the BPO space. We have already completed two acquisitions. We are looking for more acquisitions if the right company comes by at the right price.

We are also raising the money to fund our growth in the European region. A significant part of our business comes from the US and we want to derisk that by growing our European business. We have set up a subsidiary in Germany last year and we plan to set up one in UK.

What is your view on profitability and billing rates in the near future?

Billing rates have never been a problem area for Datamatics Technologies because our realisations per unit are much higher. We don't operate on a per-seat basis and use technology and domain skills to increase productivity.

What is your outlook for the BPO segment?

There is going to be a lot of consolidation in the BPO industry. A lot of smaller players are going to be wiped away and it will boil down to three-four large players in the BPO space.

Today, captive units are a trend whether it is GE or HSBC. The industry will start moving away from this trend in the next two or three years. This is because the cost of captive players is a lot higher.

Eventually companies are going to ask themselves the question: Why are we in this business? Is this our core competency?

BPO is our core competency. Our customer attrition is much lesser than our employee attrition. The customers that we started off with 10 years ago are still with us.

How is your manpower distribution? What are the current attrition figures?

Out of a total manpower strength of 950 odd people, 650 are Indians. Our attrition rate is about 12 per cent, which is high compared to what we had in the past, but not as high as compared to the industry average.

What are the challenges the company is facing?

The biggest challenge is managing growth and working across multiple locations and nationalities. We want to maintain our first mover advantage. Our lead time is just two-three years. Maintaining the lead is a challenge.