Rahul Kanodia ,Vice Chairman and CEO, Datamatics Global

Speaking with Yash Ved of IIFL, Rahul Kanodia says, "Our target acquisitions may be product companies that will help us build our IP and solutions portfolio."

Jun 30, 2010 04:06 IST India Infoline News Service

Rahul Kanodia ,Vice Chairman and CEO, Datamatics Global, leads all strategic and corporate initiatives globally. He is responsible for drawing the blueprint and executing all programmes for the long-term growth, profitability and industry leadership of the organization. He has been focusing on delivering business solutions to address the customer's strategic and operational issues. Consequent to the amalgamation of the IT and BPO services divisions in 2009, Rahul has been driving Datamatics Global Services' launch and go-to-market of a wide array of business solutions as well as key account management.

Datamatics Global is a global provider of intelligent, value-driven business solutions. These solutions leverage the company's proven expertise in developing technology to drive business efficiency and productivity. Product innovation, IP-creation and technology collaboration form the core of Datamatics Global Services' positioning as a 'one-stop-solution provider'. The company’s international clients have included top 25 Fortune 500 companies. Datamatics is certified for ISO 9001-2008, ISO 27001 and SAS 70, and has been assessed at SEI CMMi – Level 5 (QAI), P-CMM – Level 5 (QAI). Datamatics is the First & Only Indian Services Company to win the International Asia Pacific Quality Award.

Speaking with Yash Ved of IIFL, Rahul Kanodia says, "Our target acquisitions may be product companies that will help us build our IP and solutions portfolio."

From a services company, you have evolved over the years. Walk us through your journey.
We have all along been a services company. In fact, the entire Indian IT industry grew by leaps and bounds as outsourcing became popular due to the fear of the Y2K bug and the dotcom boom.

Over the past few years, the costs of operations are increasing each year at about 15-20% and therefore margins are getting squeezed. The customers are expecting much more beyond cost savings. They want the best solution to their business problems. We thus need to address the challenges or problems of the customers, automate their processes, build intelligence into their systems. We have thus transformed into a business solutions company. Due to this strategy, we have been able to improve cost of operations. In the past two years, we have created around 20 solutions.

Some of these are smart document processing solutions like i-Q, Form 16A Processing, Click-n-Capture, Healthcare Claims Processing, Airway Bill Processing, Invoice Processing; and end-to-end solutions like e-Process Manager, Intelligent Contract Management, i-Mask, i-Mark, i-Pub, i-Architect, etc.

How is this different from the earlier services strategy?
We have designed and developed various solutions where we own the intellectual property. These solutions have a lot of artificial intelligence built-in. This has been possible due to the amalgamation of our BPO and IT services divisions. The amalgamation allowed the IT professionals to develop expertise in business processes and how to automate them, while the BPO professionals now know how to use technology to drive business value. This solutions approach has given us a huge advantage and a clear differentiator.

We are going down the solutions route much more aggressively. Customers are willing to talk to us in spite of an entrenched vendor because of our solutions. With the solutions, the customer says, "Wow! You've got something that is not with anybody else." Customers see value in what we do. That is evident from us getting a pie of business in select, niche areas in spite of larger vendors already being present. The customers can continue with the existing vendor for their existing services, and they need not make a corporate decision of moving away from the existing vendor. We are chasing this segment very aggressively and are ramping up our sales force from 30-40 last year to around 150 this year.

Are you in the race for any acquisitions?
We keep looking at making acquisitions, but we are not desperate. A lot depends on the valuations. We are looking at deals that allow us to leverage and make money. We are not going to make acquisitions for the sake of showing growth, or to add to our topline. It has to make business sense. Our target acquisitions may be product companies that will help us build our IP and solutions portfolio but also service companies where we automate processes and take out operating costs rapidly. A typical M&A can earn you 5-10% but if I reduce operating costs by 20-30% my payback period is small. We have the technologies and tools to do that. So we are looking for services companies where we can make their operations far more efficient than they are currently.

How much has your business been affected during the economic slowdown?
Like the rest of the industry, our business too was impacted due to the slowdown in the global economy. Winning new contracts was a challenge, though we did not face any price pressures.

We have already seen a revival. One trend is that the customers are now focusing on business solutions and not just low-cost offshore IT or BPO services.

Brief us about your international operations?
Our geographical spread is largely 55% US and 45% Europe. We have worked in other countries, like Australia and Middle East but we don't focus on these countries. But whenever opportunities arise here, we execute. Our focus is the US, India, German-speaking DACH region (Germany, Austria & Switzerland), UK and the Scandinavian countries in Northern Europe.

As a near-shore delivery centre, we are looking at setting up a centre in Bosnia or Romania. We are piloting projects in these two countries. We are assessing the quality, the calibre of the people, the services they can deliver and their attitude before we set up a large project. There are also issues like the labour laws and the workers' union. They will deliver projects that will move out of the European front-end because India is already low-cost, so the work that is being done in India will not move there. We are trying to leverage the linguistic advantage of having people speaking French and German. We will now push harder for local language projects in Europe. We would have met our target if we have a strength of 100-200 in these locations in the coming year.

Are you looking at expanding in the domestic market?
India has been a very price-sensitive, low-profit, low-cost market. This did not excite us at all. What's happened over the past couple of years is that the price levels have moved up. So, Indian corporates are paying a higher price, equivalent to counterparts overseas, than what they did earlier. They are also demanding the best. This makes it more exciting to operate in India. The price increase would be anywhere in the range of 40 to 100%. Having said that, the corporates are also negotiating as hard as possible to get as low a price as possible.

Currently, India is insignificant, may be 1-2%. But in FY10, India will make up around 10-15%. The conversion rates are very high in the domestic market. We already have 20-30 customers in the domestic market for FY10 and many more customers are expected for FY11.

What are the typical deal sizes in the domestic market?
The deal sizes in the domestic market move in a wide range. Some of the deals are Rs 1-2 lakh, some are in the range of Rs 200-300mn. This is in the first year (2009-10). As we go into the second year, the larger deal sizes will range between Rs 500mn-1bn while the smaller ones will continue to be at Rs 1-2 lakh. We are targeting telecom, banking, insurance, logistics and little bit in manufacturing in India.

The perception is that you are risk-averse. Do you see it affecting growth?
Because Datamatics had a lot of technology talent, the mindset was more toward delivering world-class technology than on winning large customers. Over the past year, we have built a team of professionals that have more of a business and commercial mindset. So, the culture of the organization has changed.

We may have probably been focused more on the internal operations of the company than the market. We have not been risk-averse; that's merely a perception. We have been conservative in leveraging our equity, in making acquisitions. This too has changed. Last October, for the first time ever, we have bought IP from a product company even though we ourselves are not a product company. We are now going to market with the product. We are now going by what the market wants and needs.

We have programmes running aimed at addressing the softer issues, in bringing about a cultural change. For example, in the Eagle programme, we had a crack team of 21 working on three live projects. These teams delivered productivity gains of 250-400%. The focus was on motivating, inspiring the team, channelizing the energies of the team, team bonding and cohesiveness. It had nothing to do with the technology or processes. The team was encouraged to come up with radical, out-of-the-box approaches that gave this kind of phenomenal improvement. Seeing this success, we have rolled out phase II of the Eagle programme.

The Just Do It programme is about, "come what may, I'll just get it done!" especially when faced with challenging situations. If you sit down to plan, it's possible that you will never be fully ready. Along with these programmes, the portfolio of solutions, intellectual property, and aggressive marketing, we are now engaging with analysts, attending industry events, and getting on board external consultants wherever required. We already have a strong middle and senior management and are hiring more.

Brief us about your new appointments?
We have recently brought on board quite a few business professionals at the Senior Vice President level and above. In 2009-10, Dr. Chandra Mauli Dwivedi joined us as President and Global HR Head, Krishna Tiwari joined us as Global Head, Online Publishing and Media Solutions and Punit Jain joined as Global Head, Smart Document Processing.

In the past few months, we have strengthened our management further with the appointment of Ramkumar Akella as Chief Operating Officer, Ravindra Datar as Head, Global Marketing and Anand Subramanian and Ashok Muttin as Senior Vice Presidents, Finance & Accounts Sales.

These are all industry professionals with decades of industry experience brought on board to drive Datamatics' aggressive growth strategy.

What is your view on the rupee?
The rupee should become stronger and should touch the 43 mark against the dollar.

Comment on your margins between BPO and IT services?
We have managed to keep the operating margin steady in the 15-20% range.

Brief us about your financials?
Our income from operations and other income together made up Rs2.75bn in FY10, lower than the Rs3.10bn in FY09. For quarter ended 31 March 2010, the revenue stood at Rs692.5mn as compared to Rs722mn for the quarter ended 31 March 2009. Our net profit stood for the full year was Rs213mn compared to Rs275mn last year.

As I mentioned earlier, the lower income was primarily due to the fact that we saw challenges in winning new contracts and the Indian rupee gained significant strength against the US dollar. But the important fact is that our profitability has improved quarter-on-quarter (Rs51.2mn in Q410 versus Rs46.6mn in Q409). We are pursuing sales more aggressively in the coming year.

What is your current debt?
We have debt of Rs498.7mn, down from Rs635.7mn last year.

What is your current headcount. Any hiring plans?
Our current headcount stands at around 2,500. It won't go up substantially because we are using technology to reduce headcount. So, if I grow, the headcount will not grow proportionately. So the next year, the head count may probably be around 3,500 but our topline and bottomline growth will be more because of the technology we use. We have been ramping up our sales force from 30-40 last year to around 150 this year.

What is the current promoter holding?
Our promoter holding is 65.85%.

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