Corporate Front: Strategy, Can Mastek Program A New Strategy?

CORPORATE FRONT: STRATEGY
Can Mastek Program A New Strategy?

It may be late, but the exception to the industry is also quitting product development for software services.

By Anshu Tandon

Ashank Desai Summer of 1994: Mastek's Singapore-based subsidiary, Mastek Asia Pacific, is bustling with activity. To keep pace with the growing demand for Mastek's products for stockbrokers and bankers, the company sets up a subsidiary in Malaysia, dubbed Mastek Software, Malaysia, and opens an office in Indonesia. In all, 150 software programmers and marketing personnel don Mastek colours in the Asia-Pacific.

Summer of 1997: Stockbrokers and financiers are, understandably, the first to flee as the Great Asian Meltdown begins. Mastek bears the brunt of stalled orders, cash-starved customers, and stagnant production lines. The company shuts down its Indonesia office, and scales down operations in Malaysia and Singapore to 40 people. And is yet to recover Rs 15 crore of the Rs 18 crore it invested in developing and selling products in the region.

It's the black sheep of the country's software industry. At a time when software stocks are the only bright sparks in the languid stockmarkets, the Rs 37.03-crore Mastek, once a star on the software horizon and a darling of the foreign institutional investors, is lagging behind. The company's scrip has fluctuated between Rs 90 and Rs 355 this year, and currently quotes at Rs 290 on the Bombay Stock Exchange. On a small equity-base of Rs 3.45 crore, Mastek gets a discounting of 29, against the average price-earnings of 56.57 for the top 4 software companies: NIIT, Infosys Technologies, Satyam Computers, and Tata Infotech.

Ironically, the Mastek Group has reported a 44.80 per cent growth in revenues in 1997-98, from Rs 69.55 crore in 1996-97 to Rs 100.75 crore last year. But Mastek owes this growth essentially to its 4 international subsidiaries: the œ3.70-million Mastek uk (Mastek's stake: 85 per cent), the $5.70-million Majesco Software, US (100 per cent), the S$ 5.20-million Mastek Asia Pacific, Singapore (100 per cent), and the RM 9.79-lakh Mastek Software, Malaysia (100 per cent). These revenues are not reflected in the books of the listed Mastek, which has grown by 13.20 per cent, from Rs 32.70 crore in 1996-97 to Rs 37.03 crore in 1997-98.

But their earnings are reflected in Mastek's books, and that is where it has been found wanting. Profits have been steadily declining, from Rs 4.14 crore in 1995-96 to Rs 3.87 crore in 1996-97, and to Rs 2.82 crore last year (Mastek has not yet released its balance-sheet for 1997-98). The company's Earnings Per Share (EPS) has also been plummeting, from Rs 12.03 in 1995-96 to Rs 8.16 last year. Mastek was also one of the few software companies to post negative cash-flows for 2 successive years: ÄRs 1.91 crore in 1995-96 and ÄRs 4.77 crore in 1996-97.

Also unusual for a software stock is Mastek's high reliance on debt: at Rs 12.69 crore, its sundry debtors for 1996-97 accounted for 42.60 per cent of its revenues. Thus, thanks to high overhead expenditure and interest, Mastek's gross profit margins stand at 8.18 per cent. In comparison, the Rs 260-crore Infosys Technologies'--which, incidentally, was set up 9 months before Mastek was incorporated in April, 1982--gross profit margins stand at 29 per cent. Admits Ashank Desai, 47, CEO, Mastek: "We chose to be in a different business--products--which is more risky. The business did not take off as expected, and the South-East Asian market collapsed. That is where we lost money."

It wasn't so in the beginning. In the 1980s, Mastek decided to sell software products in the domestic market at a time when it was receptive to product development. After all, import duties on packaged software were prohibitively high at 180 per cent, and the market was more in tune with customised software development and, in particular, management software, the niche Mastek was targeting. In the late 1980s, Mastek flowered, thanks to products like Mamis--a self-developed Enterprise Resource Planning (ERP) package--and Ingres, a relational database package for which it had the sole agency rights from the US-based ask.

However, post-1991, when the Customs duties on imported packaged software fell drastically--to 20 per cent initially, and no duty now--Mastek found itself competing against world-class ERP software from, among others, the $5.68-billion Oracle, the $700.40-million Informix, and the $852.80 million-Sybase. Moreover, ask was taken over by the $4.04-billion Computer Associates of US in 1994 and, for a brief period, Ingres lost focus while competitors gained ground. Says a Delhi-based industry analyst: "The market was in the US while Mastek tried to prune costs, stay close to home, and stayed mediocre."

Even when software service exports boomed, post-1992, Mastek failed to re-invent itself fast enough. Says a Bangalore-based software competitor: "That is when transnationals came to India with big software projects. That is when domestic companies were able to establish their credibility in the market. However, at that time, Mastek was pursuing a totally different market." Explains Desai: "We started as a products company for the domestic market, which is a high-risk business. Sure, our growth may have been slower, but when the going was good, the margins were also higher." While that is true--products can command margins of up to 60 per cent, double the margins in service exports--Mastek's products let it down. And, then, it badly erred in its choice of markets: the Asia-Pacific.

Unfortunately for Mastek, the region is hardly the market to sell software services--the US is. For, margins in software and services exports are much lower in the Asia-Pacific than in the US and the UK. Apart from the financial consequences, there have been intangible losses: Mastek acquired the reputation of being unable to hire or retain bright people. Says a Delhi-based competitor: "What attracts employees are customers and the stockmarket. With poor branding, Mastek has come to be known as a second-tier company." Disagrees Desai: "Our employees feel better as they now have a chance to go to the US, where the real action is."

The importance of people power cannot be underestimated as Mastek has shifted its focus from products to services: today, 90 per cent of its revenues come from services. While the company has set up subsidiaries in the US and the UK, Mastek says it will widen its reach by setting up subsidiaries in Germany, Belgium, and Japan by 1999. Says Desai: "We opted for the subsidiary model, and hired local CEOs so that our companies have a local touch, and the customer feels closer to the organisation."

But the company still retains more than a passing interest in products: Mastek is now working with software product companies that sell products for customer asset management, such as the $153.40-million Vantive, C-Bells, and Scopers. Says Ketan Mehta, 40, Director, Mastek: "That is the next wave of products after supply-chain management. We want to use our experience to cater to that niche." Adds Desai: "We still have the intellectual property rights for our products, and we will use them as and when we are ready to address the market."

Sure, its background in products has helped Mastek, most of whose business is on client-server technology. And this is exactly where most organisations are moving to from mainframes or legacy systems. But, as a venture capitalist points out: "Mastek could have grown faster and made profits with Y2K projects." And the absence of those revenues is reflected on domestic bourses. Agrees Bhupendar Ahuja, 26, Associate, J.P. Morgan: "Mastek's valuation could have been better had it performed in line with the industry. But an EPS of Rs 8.11 is not low."

This subdued optimism is shared by Pradeep Gupta, 42, Managing Director International Data Corp. (India): "There was nothing wrong with Mastek's business model. There is always a risk of failure in products, and Mastek took that risk. There is no reason why it can't fare well in services." True. While most software companies are moving up the value-chain to product development, Mastek is moving in the opposite direction. As it scripts its new code for the market, Mastek has to quickly make up for its diffused focus and wasted potential. For, it is way behind in the software race.

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