3i Infotech-Developing a Hybrid Strategy

Case Study 71© 2011 IUP. All Rights Reserved.

3i Infotech: Developing a Hybrid Strategy

The globalization of markets for goods and services is continuing at an unabated pace. But the globalized marketis highly fragmented and there are several players in IT industry who focus on one or two lines of businessand operate globally or in one geography. While other IT companies focused on either the software servicesbusiness or the products business, 3i Infotech envisaged to straddle both domains and has positioned itself asSolution Company having a service-product mix. But initially the company did not have products to offer to therequirements of the emerging economies. So they adopted and developed a strategy of acquiring products alreadylaunched and accepted in the market and making them stronger offerings. The case analyzes the pros and consof this unconventional strategic plan and contemplates on the issue if the same unprecedented growth of 3iInfotech would continue with this same strategy.

Udbhav Shah*, Sakshi Goenka** and Surajit Ghosh Dastidar***

* Dravyasiddhi – Proprietor (Mutual Fund Advisor), 12 Mangalyam Society, Satellite Rd, Ahmedabad 380015Gujarat, India. E-mail: [email protected]

** Senior Analyst, Global Healthcare Group, Investment Banking Verity Knowledge Solutions Pvt. Ltd.,1st Floor, Building No. 14, Raheja Mindspace, Hitech City, Hyderabad, India. E-mail: [email protected]

*** Assistant Professor, IBS, Hyderabad, India; and is the corresponding author. E-mail: [email protected]

Introduction3i Infotech has undergone great evolutionary changes within few years from being just aprocessing unit of ICIC Ltd., to a stand-alone company earlier known as ICICI Infotech.Since 1999, the company’s revenue grew from 417 mn in 1999-2000 to 12.24 bn in2007-08.1 The company took a hybrid strategy which resulted in revenues coming fromservice and product portfolio (50:50), and from developed as well as emerging markets.Such ‘de-risked’ business model can propel the growth of the company in the future.

In its early phase (in early 2000), the company not only adopted an organic growth,but also an inorganic growth to expand its product and service portfolio among thedeveloped as well as emerging markets. To execute its action plan efficiently, 3i Infotechraised US$150 mn and €45 mn through zero-coupon Foreign Currency Convertible Bond(FCCB). The company has been performing well but now (2008) is the real testing timewhen the world is undergoing an unprecedented ‘sub-prime’ crisis. The question is: Willthe company be able to survive and maintain the pace of growth in the future, and whatare the future growth drivers in terms of vertical and geographical growth?

Background3i Infotech, promoted by the New York Stock Exchange (NYSE) listed ICICI bank, hascome a long way since its inception. In 1993 it was a part of ICICI Ltd., just as a back office

1 Annual Report, 2008.

Case Study

The IUP Journal of Business Strategy, Vol. VIII, No. 1, 201172

processing unit with a mandate of acting as a ‘Registrar and Transfer Agent’ for the parentcompany, ICICI Ltd. Early in 1997, its investment was in cutting edge technologies likeimage-based processing and rule-based workflow management, to provide top qualityservice to its retail investors. Its excellent performance has given it an additionalresponsibility of implementing processes and supporting technology innovation withinthe ICICI Bank group.

The company continued its operations with the parent company till 1999 by whichtime it had built a consolidated set of manpower skills and expertise that would enableit to operate on its own. In 1999, it emerged as ICIC Infotech and began servicing clientsother than the ICICI group. It also started expanding into markets like the US, Europe,Middle East and the Far East, providing them with a wide range of solutions.

Till 2005, a larger portion of revenues of ICICI Infotech came from ICICI group whichcame down to 27% in FY05. Though having an individual existence, the company wasperceived as an ICICI-managed company and was predominantly overshadowed by its bigbrand. Thus, the stature of the company was getting dwarfed. In view of all these factors,the name of the company was changed to ‘3i Infotech Limited’, which became effectivefrom January 20, 2005. Over a decade, 3i Infotech has successfully established itself as aglobal technology company through its hybrid strategy (software + product and organic+ inorganic growth).

Today, 3i Infotech offers a comprehensive range of software and IT solutions, includingpackaged applications for Banking, Financial Services and Insurance (BFSI), manufacturing,contracting, and retail and distribution industries. The company also offers a broad rangeof software services, such as custom software development, IT consulting, internet securityand IT security consulting, Enterprise Application Integration (EAI), managed IT services,and specialized services such as product re-engineering, compliance consultancy,application rehabilitation and e-governance. The company primarily operates in India,Asia-Pacific, Europe, the Middle East, Africa and the US. With its headquarters locatedin India, the company has a worldwide presence through 24 offices in 12 countries across5 continents servicing 600+ customers in 50 countries. It has a strong human resource of6000+ professionals working in 5,00,000+ sq. ft state-of-the-art infrastructure (Figure 1).

In Asia, 3i Infotech has pioneered in retail lending solution, factoring solutions, end-to-end offerings in claim processing and life insurance solutions. The company is a leader infund accounting and investor servicing in the mutual fund sector in Malaysia and antimoney laundering in India. Its leading position was given recognition through variousawards. It was recognized as one of the top 4 Indian software product companies, beingawarded as the best e-governance system integrator 2008 at the 4th Dataquest e-governanceSummit, 2008. It won the Frost and Sullivan’s Growth Strategy Leadership Award for Mid-Market Enterprise Application 2007, and the Australian Banking and Finance – Insurance

Case Study 73

Awards 2007 for being the best service provider of the year. In the same year 3i Infotechwas appreciated and awarded the Independent Software Vendor (ISV) award from Oracle, the3rd Enterprise Application Software (EAS) vendor in the Middle East and North Africaregion by International Data Corporation (IDC) and the IBM Strategic Partner 2007 fromInternational Business Machines (IBM).2 Thus, it is evident that the strategy adopted by3i Infotech has gained fruits.

Evolution of the Indian IT IndustryThe Indian IT industry was born in 1970 as a result of the foray of Tata Consulting Services(TCS) into the domain of outsourced application migration work from other Tata groupcompanies and other companies. It formed alliance with Burroughs and formed a newcompany. Burroughs wanted to sell hardware to India and Tata wanted to exploit thepersonnel placement (bodyshopping) opportunities. So, the merger lasted for a while.In the First phase (1968-84), it was all about ‘bodyshopping.’3

Later, the Indian IT industry matured and earned reputation over a period of 15 years.Development in infrastructure, policy reforms and communication technologies made

2 Annual Report, 2008.3 Subhash Bhatnagar, “Indian Software Industry”, available at http://www.iimahd.ernet.in/~subhash/pdfs/

Indian%20software%20industry.pdf

Figure 1: Geographical Spread

USAProductsInsuranceERP/ERMBanking

ServicesSoftware ServicesOffshore ProjectsGovernment Services

Europe

ProductsInsuranceCapital Markets

ServicesSoftware ServicesOffshore Projects

MEARC(Middle East Africa)

ProductsInsuranceERP/ERMBankingCapital Markets

ServicesSoftware Services

APAC

ProductsInsuranceCapital MarketsERP/ERMBanking

ServicesSoftware Services

South AsiaProductsInsuranceCapital MarketsERP/ERMBanking

ServicesSoftware ServicesManaged ServicesGovernment ServicesBPO

Source: Company, ICICI Direct Equity Research Report, 2007 (www.icicidirect.com/mailimages/3i_Infotech.pdf)


the outsourcing possible. During 2002-03, the software export sector logged a 30%growth (US$9,200 mn) and accounted for 20.4% of the overall export revenue. Softwareservices grew at 26% (US$12.8 bn), but the newly emerged segment IT-Enabled Services/Business Processing Outsourcing (ITES/BPO) logged 60%. Revenues from ITES exportsskyrocketed from 7,100 cr in 2001-02 to 11,700 cr during 2002-03, placing thesegment among the sunrise markets within the Indian Information and CommunicationTechnology (ICT) domain. However, the Indian IT companies were still not focusing onthe software products. The National Association of Software and Services Companies(NASSCOM) strategic review 2003 has analyzed the Indian potential in the samemanner.

Currently, we are in the third phase. Most of the leading companies which operatein the high end software service business, are also entering the product segments. Anew breed of entrepreneurs is also setting up product-oriented companies. There aremany factors leading to the third phase, such as local companies not being able toleverage cost; correction in foreign exchange rates; large Multinational Corporations(MNCs) have expanded aggressively in India and now compete with the Indiancompanies on price, skilled manpower as they also offer competitive prices and highersalaries.

Hybrid Strategy

Farsighted 3i Infotech Ltd. rode the wave and positioned itself as a solution providerrather than a pure ‘Services’ or ‘Products’ company. So the company has straddled in bothdomains—Products and Services. Secondly, it saw the highly competitive US and Europemarkets, and started targeting the emerging markets (Middle East, Africa and Asia Pacificregion) as they had their own specialized needs.

But the company did not have any products to offer in 2000-01. It could develop suchproducts in-house but decided to go for inorganic growth to acquire new proven productsand excess to the markets. In 2000-01 when focus on software product was less and ITindustry was in second phase, i.e., outsourcing, such aggressive thinking was unconventional.All deals were happening in the same segment (ITES – ITES, IT hardware – IT hardwareand IT services – IT services). The company has made over 20 acquisitions since2000-01 as a catalyst to organic growth.

The strategy resulted in a ‘de-risked’ business model, a wide geographical spread ofrevenue, 1:1 product and services mix and an end-to-end spectrum across variousverticals, such as banking, insurance, mutual funds, capital markets, manufacturing, retailand distribution and government. It has also enabled the establishment of a strongplatform for sustained high growth in the coming years.

Case Study 75

Inorganic GrowthAs the company envisaged straddling in both the domains, it adopted a two prongedstrategic plan to construct a portfolio of offerings. First, to acquire products/servicesalready launched and accepted in the market; and second, add 3i Infotech-driven value,to make it a strong offering.

The strategy helped it to experience a tremendous growth of 61% from 2004-08,with 20% inorganic and 80% organic expansion.4 It has made more than20 acquisitions since 2000-01 and all of them have a strategic fit with the company’sportfolio. The drivers for acquisitions have been different at different points in time thatinclude acquiring product frameworks, entry into a new geography, acquiringdelivery capability, increasing customer base, new offerings, market positioning, etc.(Tables 1 and 2).

4 Annual Report, 2008.

For example, acquisition of ‘Datacons’ has given the company entry into the lucrativemarket of Mutual Fund. ‘Stex Software’ gave the company a document imaging and workflow product which can complement all the products. ‘E-enable’ has helped in creatingBusiness Intelligence (BI) modules to be integrated with the products as well asindependent solution. ‘Rhyme Systems’ opened the door of the brokerage and privatewealth management market of UK. The acquisition of FormulaWare Inc., a US-basedsoftware company, provides a robust Enterprise Resource Planning solution for the processmanufacturing industry.

Table 1: List of Significant Acquisitions and Their Strategic Fit

Source: Annual Report, 2008 (www.3i-infotech.com)

Note: B2C means Business to Customer.

• AjaxSoftware

• Triton

• SDG

• Newton

• J&B

• Insyst

Banking InsuranceCapitalMarkets

Verticals

ERPTechnology

Services BPO ValueAdds

B2C

• SDG

• Datacons

• RhymeSystems

• Exact

• AFL

• Insyst • ProfessionalAccess

• IBSI

• Command

• Lantern

• DeltaServices

• HCCA

• Aok

• KNM

• LinearSoftware

• Stex

• E-enable

• Taxsmile

Horizontals


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Case Study 77

Organic GrowthThe management took many initiatives like improving on marketing and distributionmodel, quality process, R&D and human resources for sustainable growth of the company.These initiatives led to about 80% of organic growth contributing to an overall 61% ofcatalyst growth of the company in the last four years. From the beginning, the companyhas given importance to organic growth and considered inorganic growth as a catalyst.For that reason, the organization has a Chief-Operating-Officer (COO) in each of thegeographies concentrating on growing the respective business. This has helped not tooverlook small growing geographies. Organic growth can be analyzed as hereunder.

Marketing and Distribution ModelUse of global sales force and strategic alliance for direct and indirect selling of productsand services. Their marketing initiatives include participating and sponsoring majorindustry, group and trade events and seminars. They have also maintained regular contactswith industry research organizations; have established relationships with academicinstitutions and are members of universal standards bodies which help to share thetechnical know-how.

The company has also appointed channel partners, which are responsible for generatingsales in specified territories, to complement the sales teams, to have a local presence andknowledge of the market place. 3i Infotech also entered into alliance with softwarecompanies as well as leading consulting and software integration companies. They notonly provide the right to sub-license certain products in specific geographical markets, butalso in joint marketing arrangements. Few of their technology and business partnersinclude Oracle, Hewlett-Packard, Sun Microsystems and Microsoft which provide themaccess to latest technologies.

Quality ProcessesThe company has defined quality standards from the beginning and has set up variousteams at different levels to maintain and improve the same. Software Quality Assurance(SQA) group guides quality leaders within the project to plan and conduct various reviewsand audits. Software Engineering Process Group (SEPG) is responsible for settingstandards across the organization. Metrics group is responsible for monitoring, definingand improving qualitative goals. Defect Analysis and Process Group (DAPG) preventsdefects and problems at the project and organization levels. Technology ChangeManagement Group (TCMG) identifies, evaluates and implements new technology/methods/processes at the organization level.

The Company’s quality certifications include SEI CMMI Level 5 for its SoftwareBusiness and ISO 9001:2000 for its Managed IT Services and BPO Operations.

Research and DevelopmentR&D activities are the lifeline to knowledge-oriented organizations like 3i Infotech.It includes creation of new intellectual property; enhancement of existing products;


integration with third-party packages; creation of multi-lingual versions of products;upgradation of technology and architecture of products to keep pace with technology changes;qualifying the products on new and diverse platforms; and benchmarking, performance tuning.

The company has set up a Global Research Centre (GRC), besides having GlobalDevelopment Center (GDC) for the same. GDC participates, contributes and obtains inputsfrom various industry forums in the respective geographies. These interactions, combinedwith inputs from the field force, facilitate effective and timely understanding of markettrends/needs. To achieve this, it conducts a structured analysis, industry landscape andcountry studies. Such efforts have helped the company to tackle the complex nuances of thedynamic business situation in the BFSI segment. It was able to cross sell various productsas a composite offering and penetrated the niche markets like the Philippines.

Human ResourcesEmployees are the key contributors to the success of any business. In a knowledge-drivenindustry, they become more important due to their implicit knowledge. The companyunderstands this and has created an excellent working environment and competitivecompensation program to retain and attract the best people.

A special emphasis for the training of employees can be seen. Initial learning programfor trainees as well as continuous learning program for all employees has enabled thecompany to develop their skills and meet the changing requirements. For the purpose oftraining, it has set up a training facility with a well-equipped library and modern ITfacilities and infrastructure, at each of the major offices. Apart from training, theemployees can opt for job rotation. The wide operational model across products, services,solutions, geographies, etc., provides more than enough options.

The company is spread across geographies and cultures. So to promote culturalintegration among employees, it has formed a Cultural Integration Team (CIT). The teaminvites, discusses, proposes and implements ideas on cultural integration. Since thecompany is also into Mergers and Acquisitions (M&A), it has also set up a mergerintegration team to complement the CIT.

The most important initiative taken by the company is Knowledge Management portal(KM). It is a flexible system through which employees can access, share and publish usefulinformation. It has enabled employees to develop their skills and enhance theircompetency levels to meet the changing requirements of the company. It also provides thelatest information about the development and progress of the company.

The company has also set up an organization-wide innovation forum to kindle the spiritof innovation among all the employees. As a dividend, Premia Insurance Broking eXchange(IBX), India’s first subscription and internet-based insurance broking software was launched.

Outcome of the StrategyI believe that the Company has the right mix of products and services that will enable it

to take advantage of addressable opportunities available in global market.

– Hoshang N Sinor, Chairman, 3i Infotech

Case Study 79

Portfolio of OfferingsThe hybrid strategy has helped 3i Infotech to build a right mix of offerings to suit a varietyof needs across verticals (Figure 2). Offerings can be divided into three categories:

1. Software Product: The entire product portfolio has been acquired and value-added over the past seven years significantly speeding up its time to market andscalability (Figure 2). It includes products like Premia (insurance management),Kastle (Secure Banking Solutions), Amlock (anti money laundering and frauddetection), iBoss (integrated broker office solutions suite), DataScan.Online(document management system), Awacs (stock exchange surveillance), MFund(mutual funds), Orion (Enterprise Resource Planning (ERP)), Xroadz (EnterpriseRelationship Management (ERM)), Veda (recruitment automation solution),DataFlo (business process workflow management system). More information isgiven in Figure 3.

– Premia: The Company’s insurance suite boasts of over 60% premiums in theMiddle East through marquee clients like the American Insurance Group(AIG), Liberty Insurance, Qatar Insurance Company, Tokio Marine and FireInsurance, among others.

– Kastle: The banking suite was ranked the second in selling retail lendingsoftware by IBS publishing, London, 2006. It also boasts of clients in excessof 100 with names like Standard Chartered Bank, Emirates Bank andDeutsche Bank, among others.

– MFund: The product for the mutual fund of the company has a 65% marketshare in India.

– Orion: The company’s ERP offering is ranked among the top four ERPvendors in the Middle East and North Africa.

2. IT Services: It includes BPO, managed IT services, IT outsourcing, product re-engineering, application rehabilitation, compliance consulting, packagedapplication implementation, Enterprise Application Integration (EAI),e-governance, R&T agency and fund accounting, data warehousing and businessintelligence.

– Business Process Outsourcing (BPO): Being the registrar and share transferagent for ICICI Bank for over 15 years, it has established the companycredentials in both voice and non-voice based BPO services. It provides end-to-end outsourcing solutions for Banking, Financial Services and Insurance(BFSI) and Telecom industries, such as retail banking, credit cards, insurance,capital markets, finance and accounting services, cheque truncation,remittance processing service, telecommunication sector processes, etc.

– Managed IT Services: The company has specialized in managed IT servicesfor organizations in varied sectors, such as banking, BFSI, manufacturing,


Figure 2: Products Portfolio

3i Infotech is a globally established provider of software solutions and services for the Banking, FinancialServices & Insurance (BFSI) industry, having a bouquet of proven offerings for the Banking, Insurance,Mutual Funds and Capital Markets sector.

Source: Annual Report, 2007

ADM

Managed Services

Kas

tle

Cap

ital

Mar

ket

MFu

nd

Prem

ia


Figure 3: Solution Provider

“3i Infotech has proved as ‘One stop’ technology shop”

20 software product IPRs and range of IT services

Products

Services

BPO

Case Study 81

distribution and retail, telecommunications, Media and Entertainment (M&E)and government, among others. These services help the organization in optimizingIT initiatives and frameworks across multiple locations and functionalities toimprove business performance, decrease costs and alleviate risks. They are broadlycategorized into: custom software development, product re-engineering, applicationrehabilitation, EAI, e-governance, data warehousing and business intelligence.

3. Solutions: Products supported by a layer of services enabled the company togrow rapidly. It is a key differentiator for the company (Table 3).

Table 3: Product Portfolio Fast Track Through Acquisitions

Banking Insurance Mutual Funds/ Capital MarktsAsset Management

Kastle Core Premia Properly MFund/Asset iBOSS – Integrated BrokerBanking and Casualty Management (AM) Solution Office Solutions Suite

Kastle Universal Premia Life MFund/Investor AWACS – Stock ExchangeBanking Services System (ISS) Surveillance System

Kastle Treasury Premia Health MFund/Dealing Altimis – Stock Broking andClearing Software

Kastle Risk Premia Takaful Rhyme/Sight – Investment Arrow – Crest SolutionManagement and Wealth Management

Software

Kastle Asset Premia Life Quasar – Investment Fiscal – Integrated StockLiability Administration Software Broking and AccountingManagement System

Kastle Factoring Premia InvTrac – InvestmentCollaborator Management Solutions

Kastle Wealth Premia BrokerManagement

Kastle Anti Premia InsuranceMoney Laundering Broking eXchange

According to Skochconsulting, the onlyavailable estimate,the banking productsmarket size is ~$305 mn and growingat 16% annually.However we believeit could besignificantly larger.

Opportunity tocapture 1500-2000small and mediumsize insurancecompanies inUSA and UKcompanies.

The opportunity in this space is large covering the entireuniverse of mutual funds and brokers across geographies likeAsia, Europe and USA.

Opportunity!



– Insurance: The Company provides strategic solutions for every insurancebusiness line, giving the desired results to over 130 insurance organizationsacross the world.

– Banking: Banking solutions cover an extensive range of products that caterto banks and other financial services organizations. These also include value-added services.

– Mutual Fund: 3i Infotech provides services for strategic as well as day-to-dayoperational needs of mutual fund companies involving operations, such asfund accounting, valuation, investment management, lending, investorservices, dealing, pre-dealing, intent generation and order management.

– Capital Markets: 3i Infotech offers a wide gamut of capital market solutionsfor stockbrokers, traders, stock exchanges and regulators. These includecomprehensive stock trading software suite, advanced warning and controlsystem that handles all the critical elements of the surveillance process.

– Government: The Company had developed several projects for governmentdepartment and organizations across a variety of areas like transport, urbandevelopment, land records and education, among various others. Theyundertook the Public Private Partnership (PPP) methodology to implementcomplex projects through a mix of Build-Own-Operate (BOO), Build-Own-Operate-Transfer (BOOT) and Build-Operate-Transfer (BOT) models.

– Telecommunications: Telecom solutions, along with a range of operationsoutsourcing (BPO) services for the telecommunications sector, focused onhelping organizations achieve faster Return on Investment (ROI) and keepother operational expenses in control.

– Media and Broadcasting: 3i Infotech also offers media consulting services tomedia houses and broadcasting companies with best-of-the-breed productsfrom leading global media and broadcast solution vendors, complementedwith our expertise in system integration and project management services.

Revenue Trends and FinancialsThe hybrid strategy adopted by 3i Infotech has borne fruits and enabled it to enjoy its positionas a global technology company with deep customer penetration across the world, with lowlevels of product, geography, customer and currency concentration risks (de-risked model).

During 2000-08, 3i Infotech has experienced a tremendous growth in terms of revenue.From 417 million, the company has recorded a stupendous growth of 12,236 million bythe year 2008, experiencing an exponential growth in 2006, 2007 and 2008. The net profitfor the year 2007-08 was 183 cr which is an increase of 75.3% over the previous year..With a decent brand positioning, it has also seen a hike of 4% in the profit margin from11% to 15% (2006-08).

Case Study 83

The revenue generation is not from specific market or product, but is spread acrossdifferent geographies and various segments. Over the years, the expansion is evident inemerging as well as developed markets; by 2008, Western Europe has become its boomingmarket with 15% of the revenue generating from that region. With respect to growth inthe business segments. Banking products constituted 14%, insurance 13%, capital markets14% and ERP 8% of the total revenues respectively with a well-balanced revenue ratio of1:1 coming from products and services (Figures 4 and 5).

Figure 4: Revenue Trends ( in mn) and Profit Margins

50

45

40

35

30

25

20

15

10

5

0FY 2005 FY 2006 FY 2007 FY 2008

Gross Margin Net Margin

4343

47 47

1114

16 15

Profit Margin

Perc

enta

ge


14,000

12,000

10,000

8,000

6,000

4,000

2,000

02000 2001 2002 2003 2004 2005 2006 2007 2008

417

2,661 2,320 2,920

4,240

6,708

12,236

( i

n m

n)


Revenue by Segment (FY 2006-08)

100

90

80

70

60

50

40

30

20

10

0

Figure 5: Revenue by Geography and Segment

100

90

80

70

60

50

40

30

20

10

0

USA Western Europe MEARC South Asia APAC


Banking Insurance Capital Markets Technology Services ERP BPO

FY 2006FY 2008 FY 2007

Perc

enta

ge

6

13

48

15

1814

13

39

8

14

12

15

14

42

9

9

Revenue by Geography (FY 2006-08)

Perc

enta

ge

FY 2006

7

40

25

FY 2007

6

20

36

10

FY 2008

29

15

34

8

14

28 28

11

Case Study 85

In 2005, the company came out with Initial Public Offering (IPO) which was subscribedabout six times and the company raised 2,000 mn and 177 mn by green shoe options(Table 4). The company is continuing to have a healthy mix of debt and equity.

Sixty nine percent revenue comes from fixed price contracts, so the working capitalrequirement is intensive. For working capital and acquisitions, the company has raisedfunds. For debt and equity mix purpose, the company has issued four times FCCB. Theseare zero coupon instruments having Yeild to Maturity (YTM) ranging from 6.8% to 7.05%.Currently, the company’s debt-equity ratio is 1.32:1 (Net debt) or 1.68:1 (Gross debt).For financial reporting see Table 5 and Exhibit 1.

Road AheadTill now the strategy helped 3i Infotech to perform tremendously well, created ‘de-risked’ model in the form of geographical distribution of revenues along with a balancedspread of revenues across offerings. Today the company has robust platform in terms ofrange of product and IT services offerings, strong management team, industry specificknowledge and experience, global delivery model and a strategic focus on the Indianmarket, to start the next round of swift growth to become one of the top ten ITcompanies in India.

But the sudden and sharp drop in market valuations of US mortgage-backed securitiesin mid 2007 has shaken the US financial system and economy. Till date, the emerging anddeveloping economies have been less affected by financial market turbulence and havecontinued to grow at a brisk pace, majorly led by China and India. As 27% of the revenueis from the US market, the company needs to think from where it can compensate/boostthe loss of growth.

A recent report from Forrester Research Inc., states that global spends on IT goods andservices will grow by 6% in 2008 after a 12% increase in 2007. But Software product andIT services/outsourcing is expected to increase by 8-9%. Main engine of growth will beAsia Pacific and the oil-exporting area of Eastern Europe, Middle East and Africa.Recessionary tendencies in the US economy will be the main cause of slower growth in2008, pulling down growth in the IT purchases both in the US and with major tradingpartners in Europe. Therefore, the increase in US and Western Europe is projected at5-6%, the increase in Eastern Europe and MEA (Middle East, Africa) is projected at 14%and in the rest of Asia it is at 18%. The growth, particularly in India and China, isprojected at 18% and 20% respectively (Table 6).

But the road is not that smooth to materialize the opportunities. The company isfacing stiff competition not only from the service provider, but also from the IT productprovider. Secondly, the competition is not only from the domestic players like I-flexSolutions (acquired by Oracle), Tata Consultancy Services, Wipro Limited and InfosysTechnologies Limited, but also from the international players like Accenture, Temenos,Misys International, Sanchez, Applied Systems, Insurity, Computer Science Corporation,Fiserve, JD Edwards and Oracle.


Table 4: Balance Sheet as at March 31, 2008

3i Infotech Limited Consolidated Balance Sheet as at March 31, 2008

ScheduleAs at As at

March 31, 2008 March 31, 2007

I. Sources of Funds

1. Shareholders’ Funds

A. Share Capital I 2,305,35 1,562,99

B. Reserves and Supplies II 5,135,29 3,397,44

7,440,64 4,960,43

2. Minority Interest III 102,13 19,023. Loan Funds

A. Secured Loans IV 1,078,65 1,519,31B. Unsecured Loans V 11,578,87 4,955,59

12,657,52 6,474,90

4. Premium Payable on Redemption of FCCB 362,37 –

20,562,66 11,454,35

II. Application of Funds

1. Goodwill Arising on Consolidation 10,031,01 5,783,37

2. Fixed Assets: VI

A. Gross Block 3,665,17 2,298,00

B. Less: Depreciation 1,525,27 927,81

C. Net Block 2,139,90 1,370,19

D. Capital Work-in-Progress 791,30 183,62

2,931,20 1,553,81

3. Investments VII 33,54 1,02

4. Deferred Tax Asset (Net) 405,32 373,69

5. Current Assets, Loans and Advances VIII

A. Current Assets

a. Sundry Debtors 2,719,95 1,896,33

b. Unbilled Revenues 2,268,38 1,754,77

c. Cash and Bank Balances 2,665,44 973,70

7,653,77 4,624,80

B. Loans and Advances 2,530,74 1,154,89

10,184,51 5,779,69

Less: Current Liabilities and Provisions IXA. Current Liabilities 2,448,61 1,622,49B. Provisions 574,31 414,74

3,022,92 2,037,23Net Current Assetss 7,161,59 3,742,46

20,562,66 11,454,35

( in mn)


Case Study 87

Table 5: Profit and Loss Account for the Year Ended March 31, 2008

3i Infotech Limited Consolidated Profit and Loss Account for the Year Ended March 31, 2008

IncomeIncome from Operations X 12,052,62 6,553,17Other Income XI 183,05 154,55Total Income 12,235,67 6,707,72

ExpenditureCost of Revenues XII 6,454,13 3,521,75Software Development Cost 406,13 263,73Selling, General and Administrative Expenses XIII 2,643,16 1,446,12Total Expenditure 9,503,42 5,231,60

Profit before Interest, depreciation and amortization 2,732,25 1,476,12Interest 505,12 208,99Depreciation and Amortization 243,96 168,84Profit Before Taxation 1,983,17 1,098,29

– Deferred Taxes (Net) 7,13 9,20– Current Taxes 231,13 32,04– Fringe Benefit Tax 22,01 12,21– Mat Credit Entitlement (110,33) –

1,833,23 1,044,84– Pertaining to Earlier Years Written Off 1,25 –

Profit After Taxation and Before Exceptional Items 1,831,98 1,044,84Add/(less): Exceptional Items – 120,06Profit After Exceptional Items 1,831,98 1,164,90Add/(less): Provision for Contingency – (120,06)

Profit After Exceptional Items and Provision 1,831,98 1,044,84for ContingencyMinority Shareholders’ Interest 66,24 7,36Net Profit After Minority Interest 1,765,74 1,037,48Earnings per ShareEquity Shares, Per Value 10 EachBefore Exceptional Items and Provision for Contingency

Basic ( ) 13,40 8,00Diluted ( ) 12,65 8,69

After Exceptional Items and Provision for ContingencyBasic ( ) 13,40 8,99Diluted ( ) 12,65 8,69

Significant Accounting Policies and Notesto Accounts XIV

ScheduleFor the Year

EndedMarch 31, 2008

( in mn)For the Year

EndedMarch 31, 2007



Table 6: Domestic and Global Peers, (ICICI Direct Equity Research Report)

Company Revenue EPS P/E EV/EBIDTA Mcap/Sales

Domestic FY 08 FY 09 FY 08 FY 09 FY 08 FY 09 FY 08 FY 09 FY 08 FY 09Peers

I-Flex 2526 3245 43.55 55.65 37.1 29.0 24.9 19.4 5.3 4.1

Polaris 1143 1437 9.1 13.7 13.7 9.1 6.6 5.0 1.1 0.9

Nucleus

Software 298 387 20.45 26.45 19.2 14.9 16.6 11.6 4.3 3.3

Global Peers

FNIS (USD) 480 554 2.12 2.32 21.2 19.4 1.0 0.9 1.8 1.6

Misys (GBP) 48 50 10.43 12.8 18.3 14.9 13.2 12.2 2.0 1.9

Temenos 31 38 0.93 1.22 26.2 20.0 19.8 14.8 4.5 3.7(USD)

3i Infotech 1166 1560 12.84 16.5 11.1 8.6 10.1 8.0 1.6 1.3

Source: Company, Reuters, ICICI Direct Research Report, 2007 (www.icicidirect.com/mailimages/3i_Infotech.pdf)

Exhibit 1: Region-Specific Market Outlook

Western Europe

• Western and Central Europe is the second largest IT spender after the US, with $461 bn in 2008.

• The weaker dollar in 2007 boosted the dollar denominated growth to 15%, but a slower pace of dollarweakening and slower European economic growth in 2008 will cut growth to 5%.

MEARC (Middle East, Africa, Eastern Europe)

• Eastern Europe, the Middle East, and Africa will see much stronger growth.

• IT spending in this region has been growing at double-digit rates in 2006 and 2007. In 2008, a growthof 14% is expected.

Asia Pacific

The Asia Pacific market will grow at 14% China’s IT purchases have been growing at 30%—plus rates.

• While the Asia Pacific countries still export heavily to the US, domestic demand has been growingin China and India.

• A stagnant US economy in 2008 will slow but not derail both Asian economic growth and the growthrate for Asian IT purchases.

USA

• In Software, the US market still dominates. The US market will represent 44% of the global softwaremarket in 2008, well ahead of Western and Central Europe at 28% and Asia Pacific at 19%.

• In Software and IT Outsourcing, the US market is expected to have 8% growth.


Case Study 89

With increasing competition in the IT industry, product innovation has been animportant factor to sustain growth which 3i Infotech has to take care of. It is also verydifficult for the companies to retain the talent pool due to high attrition rates as thegrowing MNCs prove to be lucrative opportunity for the professionals.

Recent fund raising in the form of FCCB will dilute the Earning-Per-Share (EPS) aswell as the controlling stake (Exhibit 2). Also giant MNCs act as big sharks in the oceanwhich are ready to engulf the mid-sized growing companies. With market-capitalizationof around 1400-1500 cr, the company can become a probable target rather than anacquirer in the next round of M&A.

The success of 3i Infotech and the challenges it faces raises some issues. The servicebased delivery model as practiced by leading companies like Infosys and Wipro has beenunder scrutiny and experts are asking whether the business model is sustainable in thelong run? Second, can Indian software services companies move up the value chain andrise to become product companies like Microsoft and Oracle? Third, can the hybridbusiness model adopted by 3i Infotech become a good reference point for Indian ITcompanies?

Reference # 33J-2011-03-04-02

Exhibit 2: Glossary

What is a Green Shoe option?

A Green Shoe, also known by its legal title as an ‘over-allotment option’, gives underwriters the rightto sell additional shares in a registered securities offering if demand for the securities is in excess of theoriginal amount offered. The Green Shoe can vary in size up to 15% of the original number of sharesoffered. The term ‘Green Shoe’ comes from a company founded in 1919 as Green Shoe ManufacturingCompany, now called Stride Rite Corporation, which was the first company to permit this practice tobe used in an offering.

What is FCCB (Foreign Currency Convertible Bond)?

A type of convertible bond issued in a currency different than the issuer’s domestic currency, in otherwords the money being raised by the issuing company is in the form of a foreign currency. A convertiblebond is a mix between a debt and equity instrument. It acts like a bond by making regular couponand principal payments, but these bonds also give the bondholder the option to convert the bond intostock.

Source: www.wikipedia.org\greenshoeoption; www.investopedia.com\FCCB

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3i Infotech-Developing a Hybrid Strategy

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