Global Telesystems has transformed itself in the last few years from a reseller of telecom equipment to a full fledged services provider in e-business applications, software and engineering services. On the way the company has picked up probably more than its share of controversies. India Infoline met up with Manoj Tirodkar, Vice Chairman, of the company to discuss Global Tele?s prospects and the controversies, which have dogged the company in the recent past.
Manoj Tirodkar alongwith co-founder Fritz D?Silva has been the spirit behind the growth and dynamism of Global Telesystems. Last year Mr. Tirodkar was honored with the World Young Business Achiever Award 2000, the first Indian to win the award.
Global-Tele Systems (GTL) has come a long way from distribution and servicing of Subscriber end terminal to what it is today. Could you take us through the journey?
We started off as a partnership firm in 1985 and in 1987 we became a private limited company. GTL started off in the field of marketing and distribution of telecommunication products and services. In 1991 we became a public limited company followed by an IPO of Rs18mn in 1992, and a rights cum public issue of Rs180mn in 1994, out of which the public subscribed close to Rs60mn while the promoters subscribed to the rest. GTL's shareholders fund today stand at close to Rs13bn. Today, GTL carries no loans although we did carry some debt earlier. We have around 2494 employees and a huge network of operations - both nationally and internationally. We are also earmarked for an aggressive growth strategy with plans for opening at least 15-16 international offices in the next two years.
We have transformed quite dramatically from being a telecommunication product reselling company about 16 years ago to a diversified services company with predominant businesses including engineering services, software services, Internet infrastructure services and Application services. 65% of our revenue comes from domestic operations. Moreover, GTL as a company offers a unique business proposition involving a mix of Engineering and software development and no other company can match our strength in engineering. We believe that in the next two or three years this company will see about 7000 employees, more than 2mn sq. feet in occupied facilities.
So, I believe that we are a company that is heading in the direction of consolidating itself.
Could you give us an idea of the kind of projects you have lined up for your Engineering division?
In this division, we are involved in three spectrums of activity. The first is building corporate multimedia networks for which we have about 300-350 network installations, This business is worth about Rs1.5bn to Rs2bn. The component of hardware within that would be about Rs1.1bn while services would be about Rs0.9bn. The second spectrum is providing pure engineering services to those who want to create their own basic cellular services or telecommunication infrastructure. The telecom infrastructure which we are talking about is a bit different than what a MTNL or a VSNL does; For instance, there are those new age telcos who build data centres or call centres or perhaps data networks for their own use. We provide engineering services for such clients. In fact if you look at it we are quite a diversified company - we have done and continue to maintain wireless networks, GSM networks, fibre optic networks and basic telephony. The third spectrum is essentially enterprise networks. However, we are not doing hardware in this particular segment for we do hardware domestically but not internationally. So essentially if you take a wide view, we are geographically as well as technologically highly diversified, doing complex and high quality jobs involving a lot of depth. In fact, I would like to believe that at least two out of four if not three out four call centres in India are built by us. That means planning it, designing it, supplying it and maintaining it - we do all of these. This is in addition to building the single largest call centre in the private sector, which is our own. So, what we see is that there will be significant investment in telecommunication equipment as a whole by the new age telcos. And our belief is that there is tremendous need for an engineering company which plans, designs, strategises, manages and maintains solutions which integrate these equipment. Our international business in this segment was hardly worth mentioning about three years ago. This year it will be about Rs650mn to Rs1bn and it will continue to grow at more than 100% for the next two or three years. This is the kind of market potential we have. Whether GTL exploits it, remains to be seen.
Who is your direct competitor for this business?
Way far ahead of us, today is Telecom Consultancy of India Ltd (TCIL), which is the Infosys of Indian Telecom business. What has gone in their favor is that they are a DOT outfit and large number of bilateral treaties help them get projects in countries like Ghana, Somalia, Saudia Arabia and the like. We would like to believe that the kind of work we do involves far more value addition because traditionally we started off in the Enterprise Network side and since corporates have been very demanding we maintain a very high quality of work. In the enterprise network, side Tata Telecom is a competitor and they have a larger share of the market than we do because this spectrum is their core business.
Two or three years down the line, how different do you see your business profile?
Let me first talk about the latest numbers. For this fiscal, 50% of our revenues came from software, 12% from application services, 8% from Internet Infrastructure, and 30% from engineering services. However, if you look at the operating margins, the engineering division gives us about 28% margins on an average - although the different spectrums in the division may give higher margins. We are not happy with this kind of low margin but the kind of work we do there is very high quality and we are moving up in the value chain..
If you go to about three to four, years back our bottomline to revenue was about 11%. This we have strongly worked on and today it stands at 30%. If you do some analysis there were two major components eating into our cost. First, earlier we used to outsource hardware and therefore our COGS was sometimes as high as 75% to 80% of what you did. Today, we have bought it down to 56%. So on a company wide basis, we have a 44% value addition on what we do. In fact, I am expecting that in two to three years we will become a pure services company.
Again, the business model, we have driven so far is a mix of human resources and capex. We do not want to acquire something like 15000 people and become a body-shopping outfit. In fact, what we are trying to do is achieve a mixed model. We had about 800 people a fiscal back. At present, we have over 2000 people and we expect the human resources figure to touch about 4500 by the next year.
In the next three or four years, we still expect Engineering to remain a strong source of revenue. We want to bring software down to 30%, Application to 20% and the rest from Internet Infrastructure. We are taking the current slowdown as a pause and review our operations. We might even exit certain businesses or restructure certain businesses. However, what is certain is that we will grow at more aggressive pace every year. For instance if you look at the CRM business, we expect it to be Rs1bn this year and Rs2.5bn by next year for GTL. Similarly for the Engineering division, we expect it to be about Rs750mn this year, but next year it is certainly going to be about Rs2bn. Again we expect software development to increase from Rs1bn this year to Rs2bn by the next year. So, you are going to see to changing the profile of our business dramatically. In fact, we may see the growth in revenue to be around 20-25% but the bottomline is going to grow faster.
What are the kinds of business spectrums in software division?
In the software division, we essentially do four kinds of work - software development, e-consulting, Intellectual Property Rights and Systems Integration. Systems Integration is a large chunk of about Rs1.5bn with low margins of about 12-15%. In software development we have about Rs680mn, IPRs are good business of about Rs1.5bn and high profitability. The problem with this spectrum is that with the delivery of the software coming up on the net we will not be able to license the software anymore. E-commerce consulting is also a good business contributing about Rs700mn to the revenue. In fact, we believe that the future of the software division will be dependant more and more on the development and consulting spectrum and we hope to exit out of the other two.
For the coming two to three-quarters, I am worried about the domestic business, which contributes about 65% of the overall revenue. With the markets crashing and a pessimistic sentiment all around, our clients and customers seem to be reluctant to part with their cash as investments. Therefore, many of the projects I had planned for the software division will have to be capped. Moreover, I also believe that India will be affected by the slowdown in the IT sector. For instance, GTL has MNCs as most of its clients. With the slowdown affecting them internationally, it is quite natural to assume that the MNCs Indian operations would also be strained. On the International source of our business, we are not very concerned, as it constitutes just 35% of the company's revenue.
Could you throw some light on the GTL-GECS merger?
Let me start with the genesis of GECS. GECS was founded in 1991 and the company was essentially formed because we believed that with deregulation, data telephony would become big in India. Moreover, the government was doling out licenses at Rs5mn per license and it made sense to latch on to a potential explosive business across the whole of India by paying just Rs5mn. When we approached the DoT for the license we were advised to set up a separate company to target this business as the license had distinct conditions. So we set up GECS and naturally, GTL wanted to put up the entire investment for the project through GECS. Now the project cost came to around Rs3.5bn while GTL's net worth was only about Rs1bn. The government allowed us to invest only 30% of our net worth, which was about Rs300mn. So, for the rest of the money we went to the FIs for promoter loans, as we firmly believed in the lucrativeness of the project. So, that is how we ended up owning 38% while GTL owned 13%. The investment was still falling short and there was no way we could bring in the money without foreign collaborators. That is where Technology Resources Limited came into the picture with the rest of the investment. Thus GECS was born.
This was about 1994 and in 1995 we received the money to the tune of about Rs1.3bn. GTL, you must remember, still held only about 13% which was neither a controlling stake nor a management stake. About the same time, there was the listing of Sify and Rediff and a call was also made to list GECS on the Nasdaq. For a GTL shareholder, the 13% stake held no water whatsoever as it was GECS getting listed and not GTL. So, we decided to divest our 13% stake. However, TRL did not want to be left holding the baby so in effect we decided to divest 26% stake - 13% of GTL and 13% of TRL, so that both of us would not be left with a controlling stake.
So finally, when we divested we saw that it was fantastic - We had put in Rs300mn of our money and for 20mn shares at Rs250 per share we were getting about Rs5bn and that meant roughly Rs4.7bn to the bottomline! All the money we received could be made in making further strategic investments, removing debt from the balance sheet and more. In fact, we did all these. But nowhere in the process did we think of divesting the promoter's stake, although we were getting such high valuations because we had a long-term commitment to the whole venture. Later on, when we once again reviewed the situation we ascertained that it would make a lot of sense in merging the two businesses as there were a lot of synergies involved. The entire process of the merger was done with a lot of transparency involving a proper valuation, an independent committee and shareholder approval of both the companies. We believe that this merger will be a major driver of our growth.
What kind of Capex plans do you have on the anvil?
I am looking at a capex spending of about $75mn to $100mn for the next two years.
For a company like GECS, which is involved with high-end work, the employee compensation seems to be very low. Is there a reason to this?
GECS employees are in fact one of the highest paid within the company. For GTL as a whole, the compensation levels are lower than the industry standards but there are reasons to it. For one, there is a lot of churn within the organization among our various divisions given the telecommunication background of our engineers who are qualified in the sphere of data communication networks. Secondly, we are pioneers in this business and employees come to us with a desire to do high quality work. The challenging work environment more than makes for the low salary levels. Again, we are major hunting ground for our competitors. Finally, from 1993 we have put in place a plan to meet most of our manpower requirements from our own school namely the Global Information Telecom Academy. In fact, GECS employees have seen a massive increment the last year and the aggressive stock option plan more than makes up for the low salary base.
The ASP business has not really taken off worldwide. However, you seeilt a huge customer base and made huge investments. Hence the profitability earlier was low but now with the investments being depreciated the business is making money. Secondly, most of the businesses worldwide have catered to dot com clients. With that disappearing, the ASP business has been hit. We however, did not have a huge exposure to dot coms. Thirdly, most of my marketing is done by word of mouth publicity or when existing customers bring in new clients. Therefore, I save on promotional as well as customer acquisition. Again, if you look at our business model, the ASP model falls naturally in sync. If, for instance I am running a call centre for my client I am pursuing the ASP model of doing business as I am hosting all the facilities for him. On the whole, I am very positive of using the ASP model for our business.
Do have any plans for the Rs5.5bn in cash?
Not at the moment. We will use it for capital expenditure as and when the need arises. Moreover, with the scale of business growing at a remarkable pace you never know when you might need the cash.
How are the billing rates in your software division?
In the domestic spectrum we are looking at $18-$22 and in the international spectrum about $50-$60. We are below the industry average at this point of time but I am sure we will move up in the times to come.
Could you throw some light on the inventory and receivables position?
Inventory, as a % of revenue was about 120 days 4 years earlier. Now it is about 20days. Receivables are about 90 days. We are sure we will bring it down to below 80 days.
You throw some light on the inventory and receivables position?