Corporate Reports

B u s i n e s s I n d i a u t h e m ag a z i n e o f t h e c o r p o r at e wo r l d

Struggling to stay alive

pa l A s h r a n ja n b h au m i c k

Ill-conceived strategies
lead to the fall of a
leading IT company

i Infotech is facing probably

the bleakest period in the firms
history. In a way, it is facing
something of an existential crisis.
Prospects have never been dimmer
even during 2008-12, when the company was hit hard by the slowdown
in the US economy and Eurozone
crisis as, around that time, nearly 75
per cent of its revenues were from its
overseas operations.
The company has been haemorrhaging over the last four years.
In FY15 it recorded a loss of ` 976
crore the highest in the history of
the company. The loss on a consolidated basis was `357 crore in FY12,
`503 crore in FY13, and `357 crore
in FY14. The steady erosion in profit
was largely due to the high interest
expenses and depreciation charges.
The net worth of the company
was negative.
More recently, being forsaken by
its promoter icici Bank, which sold
large chunks of its holding in 3i Infotech and reduced its stake to 3.27 per
cent from 17.93 per cent before the
company went public in 2005, was
a big blow. The implicit criticism
of icici Bank, the financial institution that once backed 3i Infotech,
but eventually deserted it, isnt lost
on anyone. icici Bank is just one of
the bankers today, as it describes its
holding in the company to the stock
exchanges, seeking to distance itself
from the company.
Such a state would have been
inconceivable 10 years ago. 3i Infotech was then one of Indias highly
promising companies, having accomplished a stunning record of products and market expansion, which
in turn led to impressive earnings.
It had the vision to invest in foreign
markets like the US, EMEA, APAC and
Europe to drive growth. It even built
successful products for the banking

Madhivanan: exploring all options

and financial institutions that would

be adopted by top organisations and
change the way companies operate.
As such, one could even compare it
with Citibanks software unit, which
later became I-Flex Solutions.
As a global financial institution, the bank would, in the normal
course, buy and sell shares including holdings arising consequent to
corporate debt restructuring (cdr),
says a person close to the company,
underplaying icici Banks abrupt
move in quickly offloading its stake.
Therefore, the divestment of shares
in 3i Infotech could be a part of
this process.
Filtering the problems
icici Bank had founded 3i Infotech as
icici Infotech in1999, with the intent
of creating a standalone it company
that would focus on bfsi (banking
and financial services) products and
services. In the early years, its growth
strategy, largely fuelled by using
products as an entry-level drive, was
backed by associated services around
these offerings. Acquiring software
products hastily mainly in the bfsi
space, with borrowings from banks
to enable faster-go-to market, worked
u 54 u

J u ly 6 -19, 2 015

well for a while. However, it grounded

the company due to recession in the
US and the Eurozone crisis.
3i Infotechs predicament comes
down to this: the company could not
dominate other regions to get a steady
stream of income to make up for the
loss of its key markets. It also has been
facing a steep rise in the working capital requirements while continuing to
sustain the fixed outlay of the operation, mainly employee cost.
Another major problem was availing short-term loans on a regular basis to meet its working capital
requirement, which it was unable to
have refinanced. This implied having
to raise funds repetitively through
foreign currency convertible bonds
(fccb) in multiple tranches.
The subsequent downgrading of
its score by the credit rating firm,
crisil, further disrupted day-to-day
operations and its ability to service
its rising debt obligations, amounting to `2,380 crore. Still, it got some
advantage when, following a restructuring plan approved by the cdr
mechanism of Reserve Bank of India,
the company could convert a portion
of the outstanding debt and interest
cost into equity.
Change of guard
To overcome this dire situation, a
new management team came in
place in 2012, when Madhivanan
Balakrishnan took over as managing
director & global ceo, 3i Infotech,
moving from icici Prudential Life
Insurance Co, where he was executive director. Since the management
change took place, the objective has
been to address the debt burden issue
together with a strategy of protectconsolidate-grow, to make the company profitable within a period of
three years, said Madhivanan.
Three years later, 3i Infotech is still
weathering survival storms. Non-fruition of sblc (standby letter of credit)
proposal
and consequent interest rate benefits, high rates of borrowings at 14.75 per cent and delay

Corporate Reports

B u s i n e s s I n d i a u t h e m ag a z i n e o f t h e c o r p o r at e wo r l d

in conversion of rupee debt to fcnr

(b) debt by cdr bankers are some of
the reasons the company cites for
its collapse.
The company has now pinned its
hope on finding an agreeable resolution for the debt that the company
is having to burden. It is seeking a
strategic partner for any specific
part of the business as one of the
options, along with evaluating other
feasible alternatives.
Though clients may have migrated
to more successful players, its bankers and lenders have not followed.
In fact, the company continues to
rely on its cdr bankers for business,
some of which are also the largest
stakeholders, to leverage the dual
objectives of revenue generation and
contribution to debt reduction. However, this initiative has met with
little success. Ironically in spirit of
having a leading financial institutional as its promoter its main problem, at least on the surface seem
financial.
We sincerely believe that 3i Infotech has a strong operating business
model, with a core set of committed
clients, says Madhivanan, projecting an optimistic future. And we are
reasonably confident of arriving at
a mutually beneficial financial and
organisational restructuring model
with our stakeholders.
As 3i Infotech continues its fight
to sustain its operations, it faces the
risk of attrition of key people. It has
stepped up focus to retain talent by
means of assigning challenging and
fulfilling roles. Some of these measures have already started showing
desired results in the current year.
Our strength over the last three
years has been the stability of the
management team and their belief in
the value that we deliver to our customers, says Ashish Kakkar, global
head, hr.
At this point in 3i Infotechs evolution, the company has restructured its management team, driven
by a conviction that the success of
all business strategies ultimately
comes down to execution. The company has recruited a leader from outside R.V. Ramanan as president &
chief operating officer, to focus on

Kakkar, Iyer and Ramanan: focussing on growth

and drive the growth of the products

and icici Banks investor services. I
look forward to moulding 3i Infotech
into a vibrant and growing organisation that builds on its products
and domain strengths in providing
reliable and innovative it solutions
to its clients, says Ramanan.
Rakesh Doshi and Uday Reddy,
who between them will lead the
products delivery and customer
engagements respectively, support
Ramanan, who comes in after a long
stint in Hexaware. Meanwhile, the
multi-faceted Padmanabhan Iyer,
cfo, will look after the services side
of the business.
Products to dominate
The company is now betting on its
bfsi suite of products, combined with
the erp offering, and finding ways to
bundle them to its active customer
base. Given the companys wide footprint of customers across the financial industry segment, it expects a
reasonable level of business growth
to happen through fresh licence
upgrades and increase in the number
of licences.
3i Infotechs debt strategy is also
guided by the understanding that the
issue could be handled by restructuring or conversion to equity that
would ensure growth and reduce
overall losses. Bifurcation of debt
and capitalisation may not be ruled
out, admits Madhivanan. In this
regard, one of the options the company is exploring is that of separate
entities for the products and services,
to ensure that the respective businesses will become self-sustainable
and profitable.
When revenue from 3i Infotechs
international operations plunged,
the company, with support from its
u 55 u

J u ly 6 -19, 2 015

lenders and bankers and with the

approval of cdr-eg, identified three
offshoots as non-core subsidiaries for
divestment:
u Professional Access, one of the identified subsidiaries, which 3i Infotech
sold to Zensar Technologies in 2015;
u Rhyme, the second of the non-core
businesses, which was acquired by
Objectway Technologies, Italy; and
u Locuz Enterprises, its third ancillary unit, which the company is now
scouting a buyer for.
The proceeds from these divestments are helping cut the immense
debt liabilities.
This has given us the muchneeded elbow room to ensure that
business operations stabilise and
improve, says Iyer, acknowledging
the support of its customers, lenders, employees and vendors, who
have stood by the company to get
this far.
Now, theres another conjecture about 3i Infotechs future, one
for which evidence began to mount
in June 2015, after the stock that
quoted at a low of `2.18 in May 2015
swiftly scaled to `5.70 by end of June
2015, on reports of a buyout, even as
the company denied this. There has
been no specific development, says
Madhivanan clarifying the matter.
The company and the cdr lenders
keep getting proposals from various
interested investors, which are under
evaluation by the cdr bankers.
With a path full of challenges,
how will 3i Infotech ensure that it
continues to exist? The company
knows that, if it stays focussed on
its operations to prevent stakeholder
value erosion, it has a chance to come
out unstuck.
u SHASHI B HAGNARI
feedback@businessindiagroup.com