Acquisitions and the predictability of revenues bestow SSI with what it needs to be in the infotech super-league. Now, if only its CEO's investment decisions weren't inexplicable...

By Dilip Maitra

It's before seven in the A.M. of an already warm January morning in Chennai. He's sweating heavily, but the middle-aged man who's been running for an hour and half now around the Central Engineering College's heavily wooded campus in downtown Chennai shows no signs of stopping. His mid-way break is behind him; he still has a little more than 8 kilometres to cover to reach his target of 20 kilometres; and so, the slightly-built runner pushes on.

Some run to keep fit; others do because they like to (some run to remember; some run to forget). This particular gentleman-his name is Kalpathi S. Suresh and he is the Chairman and Managing Director of SSI-confesses he runs to ''bust the stress''. ''Running, for me, does two things. It takes the pressure and tension out of my system, and it teaches me to push on,'' adds the 37-year-old who's actually a card-carrying member of a runner's club that does cross-country marathons every once in a while.

There's enough happening for the man to want to de-stress the self: the company he founded 10 years ago (then, it was called Software Solutions India) is jostling at the portals of the infotech super-league. Its revenues for the 12-month period that will end on June 30, 2001, are expected to cross Rs 450 crore, and its net profits are estimated to be around Rs 100 crore.

To put those numbers in the correct context, SSI's turnover in 1997-98 was a mere Rs 45 crore; its net profits, Rs 11 crore. The company's scrip, which was quoting at Rs 300 in April 1999, now quotes at Rs 1498 (January 25, 2001), after touching a tech-fever spurred high of Rs 7200 on 8 March, 2000. ''SSI is one of the fastest growing companies in the infotech sector today,'' asserts Chirag Shah, an equity analyst at K.R. Choksey Shares and Securities. And with Rs 350 crore of cash reserves- arising primarily from its $100 million, Global Depository Share (GDS) issue in March, 2000-SSI is sitting pretty.

Running two races at once

That's Suresh's strategy: to expand through alliances and acquisitions, and to lower the level of business-risk by tapping alternative revenue-sources. The first weft of the latter strategy-strand was Suresh's mid-1999 decision to diversify from a pure high-end infotech education company to a software developer. In 1998-99, just about 3 per cent of SSI's revenue came from software; today, 40 per cent does (education still accounts for 55 per cent). And the first weave of the former was SSI's January-2000 creation of Indigo Markets, a 50:50 JV with the US-based NASD (National Association of Securities Dealers), the company behind the NASDAQ exchange. Indigo leverages SSI's tech- and NASD's domain-expertise to provide exchange- and internet-trading solutions to NEX-GEN stock exchanges across the world. Today, for instance, as the tech-partner to Indigo, SSI is working on projects for NASDAQ Japan and NASDAQ Europe. In 1999-2000, 45 per cent of SSI's total software revenues came through the Indigo route.

Aware that the better software companies eschew dependence on one customer or domain, SSI has worked to change this. It's customer-base increased from 18 in June 2000, to 35, six months later; and the Indigo-connection accounts for just 15 per cent of its software revenues (See SSI's Revenue Break-Up). And with offices in 14 locations across the world, and a wholly-owned subsidiary Clientsoft-a vendor of choice to companies like Deloitte and Touché, Microsoft, BMC Software, Fargo Bank, McGraw-Hill, and MCI-in the US, SSI's revenues come from diverse geographies.

In December 2000, Suresh orchestrated SSI's first global acquisition: of US-based infotech services company AlbionOrion Company (AOC), for $63.65 million (Rs 290 crore). The acquisition made business sense: AOC boasted $27 million (Rs 124 crore) in revenues and $ 4.5 million (Rs 20.89 crore) in profits in 2000, and a reputation for being a domain-expert in areas like telecom, healthcare, and insurance.

Better still, its clients include the likes of Bellsouth, Atlantic Mutual, 3m, American Express, Marriott, and Daimler Chrysler, and it has a 35 per cent stake in Albion Connect, a software products company that operates in the telecom domain.

AOC is to remain an independent company, but being a 100 per cent subsidiary of SSI, it will add Rs 184 crore ($40 million) to the latter's revenues in 2001. AOC's growth (in the pre-SSI era) was constrained by unavailability of software pros. Thus, its average revenue per client was, at Rs 1.2 crore ($0.26 million), modest. Now, the company can execute larger projects simply by transferring the bulk of the work to SSI's offshore development centres; between January and June 2001, this will generate business valued at Rs 60 crore for SSI. Says a Mumbai-based equity analyst: ''AlbionOrion is an onsite consulting firm and SSI is an offshore development company. The marriage should work well.''

There's action afoot in SSI's traditional staple, education, too. Till end 1999, SSI was bucking the trend by investing in its own centres. From early 2000, though, it moved to the widely accepted (NIIT and Aptech use it) model of franchising.

The result has been an astounding 450 per cent growth: the number of training centres has grown from 109 in 1998-99 to 304 in 1999-2000 and is expected to touch 600 by June 2001. Says Shah of K.R. Choksey: ''SSI had an almost unbelievable growth in its education business, may be because of a smaller base. I wonder if it will be able to sustain the growth rate.''

By June 2001, the company will own less than 7 per cent of its centres. And, courtesy franchising, SSI has established a significant presence in the northern and western parts of the country (today, a mere 50 per cent of the company's centres are located in the South, down from 85 per cent in early 2000). The flip side?

The adoption of the franchise route has caused the company's margins in its education business to decrease from 30 per cent to 25 per cent. Still, it does boost return on capital as SSI's incremental investment in each additional centre is minimal.

The sting in the tail

If, despite its successes on the revenues and earnings fronts, SSI's stock has remained depressed, there is a reason for it. In 1999-2000, the company ploughed in Rs 20 crore for a 45 per cent stake of a financial advisory, Netfinex.Com. According to Suresh, investment was driven by the fact that Netfinex was one of its clients, but that's a thinnish argument (especially since SSI hasn't invested in the businesses of its other clients). As Shah puts it: ''Why should SSI make such large investments in a new company which is into a untested and unproven business?''

Suresh has to resist the urge to let his personal motivations run SSI. He and his family, after all, own just around 20 per cent of the company. And it is his ability to protect the interests of non-promoter shareholders and enhance shareholder value that will ease SSI's entry into the infotech big league.

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