NOVEMBER 9, 2003
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Business Today,  October 26, 2003
i-flex At #1?
It's not entirely out of the question for this software products warrior.
Rajesh Hukku, CMD, i-flex: He, and i-flex, have arrived
» 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

One 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 go).

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?

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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 pace.

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 market?"

Deepak Ghaisas
CEO (India)/i-flex

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 solutions.

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," he explains.

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. Why not?