|Rajesh Hukku, CMD, i-flex: He, and i-flex,
WHY THE FUTURE LOOKS GOOD FOR I-FLEX
Its product Flexcube has been widely accepted
across the globe
The company's definition of the global market isn't just the
US and Europe
Its business model is a sustainable mix of products and services
The company is open to acquisitions that'll help it maintain
its 40 per cent plus rate of growth
corner of Deepak Ghaisas' office is dominated by the model of a
20-storey building shaped like a double helix (as in DNA). Each
floor is at a three-degree angle to the previous one and as the
eye travels all the way to the top the twisted double helix becomes
apparent. This is the mock-up of software products company i-flex's
mega office that is to come up in Goregaon, a Mumbai suburb, and
it is very different from the sprawling campuses (think Infosys)
that have come to be associated with the Indian infotech industry.
As if on cue, Ghaisas, the ceo of the company's Indian operations,
and the CFO of the whole, says, "No, we don't require an Infosys-style
campus; ours is not a manpower-oriented business. We may grow very
rapidly without having to hire people at all; that's the products
model. So, we've done away with the campus model." That still
doesn't explain the double helix. "Think growth," says
Ghaisas, a note of exasperation creeping into his voice now. "It's
about exponential growth, again, a characteristic of the product
model and the twist in the structure symbolises the flexibility
of the cube." For those who came in late, the 'cube' is a reference
to Flexcube, i-flex's banking software product.
The message is clear: i-flex has proven that
India can create a successful it product company and is not about
to lose any opportunity to drive home the point, even if it means
packing in a whole lot of symbolism into the structure of its HQ
(incidentally, the double helix is a first, as building structures
Still, the double-helix isn't just a manifestation
of hubris-driven excess and the headline of this article isn't a
case of a writer getting taken in by all the hype around the company.
For starters, consider i-flex's numbers. Its
sales have risen from Rs 197.50 crore in 1999-2000 to Rs 411.27
crore in 2001-02 and again up to Rs 568.43 crore in 2002-03. At
its current rate of growth (43 per cent), i-flex is growing faster
than most software services firms (the best companies of this kind
are growing at around 30 per cent). And the contribution of products
to i-flex's revenues have consistently increased, from 50 per cent
in 1999-2000 to 65 per cent in 2002-03.
While on numbers, there's
the small matter of the company's market capitalisation zooming
from about Rs 1,959 crore for the first half of 2002-03 to Rs 4001
crore for the first half of 2003-04. But #1?
Kingfisher, Titan And Flexcube
What do a beer and a watch have to do with
banking software? More than you would imagine, and then some, says
Ghaisas. "The only Indian brands recognised outside India are
these three. Any bank wanting a packaged solution today cannot ignore
Flexcube. We also take great pride in the fact that we are the largest-selling
brand worldwide in our product category which is banking solutions,
an honour no other Indian brand in any product category can claim
today." Again, the product play takes centre stage in any discussion
on i-flex's business model. Here's why.
A product company tends to find the going tough
initially given that product development, like in any other sector
(say pharma) is a risky proposition. But once the product does actually
succeed, the incremental investments in human resources required
to scale up the model are practically nil. That's very different
from the linear it services model where an expansion in workforce
is required each time the business needs to be scaled up.
However, the product model is also a high risk
one. That's what prompts an analyst at brokerage firm Equitymaster
to call i-flex an expensive buy (it is trading at a multiple of
about 25 times forward earnings for 2003-04). "Considering
the risk profile of a products company in the software sector, i-flex's
current valuation seems to be at a premium when compared to its
peers. Given the risk profile here, I would imagine that it should
trade at a multiple of 15 to 18, so this is currently an expensive
stock," he explains.
However, if investors adopt the rough-and-ready
rule that the earnings multiple at which the stock is trading should
not exceed its growth rate, i-flex still looks like a good buy.
The issue then is whether the company can continue to grow at this
One equity analyst is certain it cannot. "We
are not convinced about the market size for i-flex's products,"
he says. "Look at Temenos, a market leader in the banking software
products space. After being in existence for a couple of decades,
the company has just about managed revenues of $130 million, so
where does that leave i-flex, in what appears to be a very restricted
Not surprisingly the i-flex management has thought
that one through. "We cannot comment on Temenos' performance,
but the banking product market segment is a growing one and the
bulk of the spending today we believe is shifting in favour of packaged
solutions." says Rajesh Hukku, the company's Chairman and Managing
Director who operates out of New Jersey. And Ghaisas expects the
market for banking software products to expand at least six to seven
times its current size (Gartner pegs the market at $17 billion currently)
in the next four to five years. "There are major bottomline
pressures and every single bank which is looking at overhauling
its it systems wants to cut in-house costs and opt for packaged
Today packaged solutions account for just 15
per cent of the banking software market; we expect the remaining
85 per cent also to opt for packaged solutions in the coming years,"
Derisking, The Way Of The Future
Even while tom-toming its accomplishments in
the products space, i-flex has quietly hedged its risks with a significant
services business. It has also chosen to be present in 90 countries,
which reduces dependence on any specific geography, another departure
from the IT services model with its excessive reliance on the North
American market. Says Gartner's analyst for industry verticals (APAC
region), Kingshuk Hazra, "Reliance on software licenses alone
(for a products company) is problematic since the software licences
pie itself is very small; moreover in these difficult market conditions
every major product company has started offering services around
the product and many are further moving into process management."
Process management (in other words, Business Process Outsourcing)
may be a clear move down the value chain for a company like i-flex,
but its several steps up the revenue ladder, argue analysts, and
once again the numbers tell the story.
According to Gartner, global revenues from
software licenses in the banking and financial services segment
stood at $17 billion in 2003. In the same year product support fetched
it services firms a total of $24 billion. And professional services
which includes process management, consulting and development and
integration did a whopping $94 billion. If i-flex's services hedge
is any indication, the company seems to have realised this. "PrimeSourcing,
which is the services part of our business, is part of our core
strategy and adds value to the services we offer our customers.
We expect this strategy to continue," says Hukku.
Finally, to address the question posed by the
headline of this article: does i-flex have what it takes to be a
future #1? It's product-plus-services model is nifty, it has secured
the go-ahead for a fresh disbursement of equity to raise up to $150
million (Rs 690 crore) and/or a sponsored American Depository Receipts
issue of up to 25 per cent of its equity capital (the equity issue
should boost its market cap and propel it further up the rankings
automatically), and it has drawn up ambitious plans for acquisitions
that will help it maintain its 40 per cent plus rate of growth.