Case Study

3i Infotech: Developing a Hybrid Strategy

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

Introduction
3i Infotech has undergone great evolutionary changes within few years from being just a processing unit of ICIC Ltd., to a stand-alone company earlier known as ICICI Infotech. Since 1999, the companys revenue grew from 417 mn in 1999-2000 to 12.24 bn in 2007-08.1 The company took a hybrid strategy which resulted in revenues coming from service 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 the developed as well as emerging markets. To execute its action plan efficiently, 3i Infotech raised 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 time when the world is undergoing an unprecedented sub-prime crisis. The question is: Will the company be able to survive and maintain the pace of growth in the future, and what are the future growth drivers in terms of vertical and geographical growth?

Background
3i Infotech, promoted by the New York Stock Exchange (NYSE) listed ICICI bank, has come a long way since its inception. In 1993 it was a part of ICICI Ltd., just as a back office
Dravyasiddhi Proprietor (Mutual Fund Advisor), 12 Mangalyam Society, Satellite Rd, Ahmedabad 380015 Gujarat, India. E-mail: udbhavshah4me@gmail.com * * 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: goenka45@gmail.com *** Assistant Professor, IBS, Hyderabad, India; and is the corresponding author. E-mail: sghoshdastidar@lycos.com
1

Annual Report, 2008. 71

2011 IUP Case Study . All Rights Reserved.

processing unit with a mandate of acting as a Registrar and Transfer Agent for the parent company, ICICI Ltd. Early in 1997, its investment was in cutting edge technologies like image-based processing and rule-based workflow management, to provide top quality service to its retail investors. Its excellent performance has given it an additional responsibility of implementing processes and supporting technology innovation within the ICICI Bank group. The company continued its operations with the parent company till 1999 by which time it had built a consolidated set of manpower skills and expertise that would enable it to operate on its own. In 1999, it emerged as ICIC Infotech and began servicing clients other 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 which came down to 27% in FY05. Though having an individual existence, the company was perceived as an ICICI-managed company and was predominantly overshadowed by its big brand. 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 effective from January 20, 2005. Over a decade, 3i Infotech has successfully established itself as a global technology company through its hybrid strategy (software + product and organic + inorganic growth). Today, 3i Infotech offers a comprehensive range of software and IT solutions, including packaged applications for Banking, Financial Services and Insurance (BFSI), manufacturing, contracting, and retail and distribution industries. The company also offers a broad range of software services, such as custom software development, IT consulting, internet security and 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 located in India, the company has a worldwide presence through 24 offices in 12 countries across 5 continents servicing 600+ customers in 50 countries. It has a strong human resource of 6000+ 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-toend offerings in claim processing and life insurance solutions. The company is a leader in fund accounting and investor servicing in the mutual fund sector in Malaysia and anti money laundering in India. Its leading position was given recognition through various awards. It was recognized as one of the top 4 Indian software product companies, being awarded as the best e-governance system integrator 2008 at the 4th Dataquest e-governance Summit, 2008. It won the Frost and Sullivans Growth Strategy Leadership Award for MidMarket Enterprise Application 2007, and the Australian Banking and Finance Insurance
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Figure 1: Geographical Spread

South Asia

Europe Products Insurance Capital Markets

USA
Products Insurance ERP/ERM Banking Services Software Services Offshore Projects Government Services

Products Insurance Capital Markets ERP/ERM Banking

Services Software Services Offshore Projects

Services Software Services Managed Services Government Services BPO

MEARC (Middle East Africa)

Products Insurance ERP/ERM Banking Capital Markets Services Software Services

APAC
Products Insurance Capital Markets ERP/ERM Banking Services Software Services

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

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

Evolution of the Indian IT Industry

The 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 group companies and other companies. It formed alliance with Burroughs and formed a new company. Burroughs wanted to sell hardware to India and Tata wanted to exploit the personnel 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 3

Annual Report, 2008. Subhash Bhatnagar, Indian Software Industry, available at http://www.iimahd.ernet.in/~subhash/pdfs/ Indian%20software%20industry.pdf 73

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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. Software services 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 exports skyrocketed from 7,100 cr in 2001-02 to 11,700 cr during 2002-03, placing the segment among the sunrise markets within the Indian Information and Communication Technology (ICT) domain. However, the Indian IT companies were still not focusing on the software products. The National Association of Software and Services Companies (NASSCOM) strategic review 2003 has analyzed the Indian potential in the same manner. Currently, we are in the third phase. Most of the leading companies which operate in the high end software service business, are also entering the product segments. A new breed of entrepreneurs is also setting up product-oriented companies. There are many factors leading to the third phase, such as local companies not being able to leverage cost; correction in foreign exchange rates; large Multinational Corporations (MNCs) have expanded aggressively in India and now compete with the Indian companies on price, skilled manpower as they also offer competitive prices and higher salaries.

Hybrid Strategy
Farsighted 3i Infotech Ltd. rode the wave and positioned itself as a solution provider rather than a pure Services or Products company. So the company has straddled in both domainsProducts and Services. Secondly, it saw the highly competitive US and Europe markets, and started targeting the emerging markets (Middle East, Africa and Asia Pacific region) as they had their own specialized needs. But the company did not have any products to offer in 2000-01. It could develop such products in-house but decided to go for inorganic growth to acquire new proven products and excess to the markets. In 2000-01 when focus on software product was less and IT industry 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 hardware and IT services IT services). The company has made over 20 acquisitions since 2000-01 as a catalyst to organic growth. The strategy resulted in a de-risked business model, a wide geographical spread of revenue, 1:1 product and services mix and an end-to-end spectrum across various verticals, such as banking, insurance, mutual funds, capital markets, manufacturing, retail and distribution and government. It has also enabled the establishment of a strong platform for sustained high growth in the coming years.
74 The IUP Journal of Business Strategy, Vol. VIII, No. 1, 2011

Inorganic Growth
As the company envisaged straddling in both the domains, it adopted a two pronged strategic plan to construct a portfolio of offerings. First, to acquire products/services already 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 than 20 acquisitions since 2000-01 and all of them have a strategic fit with the companys portfolio. The drivers for acquisitions have been different at different points in time that include acquiring product frameworks, entry into a new geography, acquiring delivery capability, increasing customer base, new offerings, market positioning, etc. (Tables 1 and 2).
Table 1: List of Significant Acquisitions and Their Strategic Fit
Verticals Banking Insurance Capital Markets ERP Technology Services Horizontals BPO Value Adds B2C

Ajax Software Triton SDG Newton J&B

Insyst

SDG Datacons Rhyme Systems Exact AFL

Insyst

Professional Access IBSI Command Lantern

Delta Services HCCA Aok KNM Linear Software

Stex E-enable

Taxsmile

Note: B2C means Business to Customer. Source: Annual Report, 2008 (www.3i-infotech.com)

For example, acquisition of Datacons has given the company entry into the lucrative market of Mutual Fund. Stex Software gave the company a document imaging and work flow product which can complement all the products. E-enable has helped in creating Business Intelligence (BI) modules to be integrated with the products as well as independent solution. Rhyme Systems opened the door of the brokerage and private wealth management market of UK. The acquisition of FormulaWare Inc., a US-based software company, provides a robust Enterprise Resource Planning solution for the process manufacturing industry.
4

Annual Report, 2008. 75

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Table 2: List of Acquisitions and Other Details

Products Name India 100 160 Location Capability Stake (%) Payment (mn) Revenue (mn) 100

Vertical

SDG Software Technologies Asset Rhyme Management Systems Datacons Mutual Funds MFund Insyst Insurance Corban J&B Newton Triton Banking Ajax UK India India India USA USA Korea India India India India 100 100 100 100 100 100 100 100 100 51 100

19.6 400 300 113 47 $25 179 52

15 $5 $25.25 120

Delta HCCA

BPO/Transaction Services India India USA

Aok

Products in banking and capital markets, focus on surveillance and fraud management, products like Bank alert an anti-money laundering software application. Products in asset management space, got access to marquee clients like Brewin Dolphin, Coutts RBS, Jupiter, M&G, Barclays and LCH Cleamet. Niche products for mutual funds in BFSI, retail and distribution segments. Acquired through acquisition of Datacons, capability in mutual funds. Capability in Insurance and ERP . Software solutions. Products and services in remittance processing in USA. Core Banking, acquired from IMS System Company, Korea. Transaction Processing for retail industry. Entry into Banking Vertical. Services Focused on BPO. Delivery capabilities in HR operations including large scale payroll processing for clients in BFSI sector. Delivery capabilities in the area of credit cards and auto loan processing for banking sector and proposal processing for the insurance sector. Clients include American Express Bank, Max New York Insurance Co. ABN Amro Bank, ICICI Bank Ltd. and ICICI Prudential Life Insurance Co. Delivery capabilities in niche area of cheque truncation for banks. Software support and Development services. 50.5 60 100 51 100 Specialization in the area of e-commerce for the BFSI and retail segment along with access to marquee clients in USA. Business Intelligence (BI) and Security.

18 $24 $3.6

$4 $12 $7.20

Technology Services

KNM Rohan Software Professional Access IBSI

The IUP Journal of Business Strategy, Vol. VIII, No. 1, 2011 India India India

Value-Adds

Stex Genesis E-Enable Taxsmile

Workflow and document imaging software. Business Intelligence (BI). Offering in e-tax filing and tax advisory space for individuals.

100 51 26

61 51.1

65 65

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

Organic Growth
The management took many initiatives like improving on marketing and distribution model, 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% of catalyst growth of the company in the last four years. From the beginning, the company has 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 the geographies concentrating on growing the respective business. This has helped not to overlook small growing geographies. Organic growth can be analyzed as hereunder.

Marketing and Distribution Model

Use of global sales force and strategic alliance for direct and indirect selling of products and services. Their marketing initiatives include participating and sponsoring major industry, group and trade events and seminars. They have also maintained regular contacts with industry research organizations; have established relationships with academic institutions and are members of universal standards bodies which help to share the technical know-how. The company has also appointed channel partners, which are responsible for generating sales in specified territories, to complement the sales teams, to have a local presence and knowledge of the market place. 3i Infotech also entered into alliance with software companies as well as leading consulting and software integration companies. They not only provide the right to sub-license certain products in specific geographical markets, but also in joint marketing arrangements. Few of their technology and business partners include Oracle, Hewlett-Packard, Sun Microsystems and Microsoft which provide them access to latest technologies.

Quality Processes
The company has defined quality standards from the beginning and has set up various teams 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 reviews and audits. Software Engineering Process Group (SEPG) is responsible for setting standards across the organization. Metrics group is responsible for monitoring, defining and improving qualitative goals. Defect Analysis and Process Group (DAPG) prevents defects and problems at the project and organization levels. Technology Change Management Group (TCMG) identifies, evaluates and implements new technology/ methods/processes at the organization level. The Companys quality certifications include SEI CMMI Level 5 for its Software Business and ISO 9001:2000 for its Managed IT Services and BPO Operations.

Research and Development

R&D activities are the lifeline to knowledge-oriented organizations like 3i Infotech. It includes creation of new intellectual property; enhancement of existing products;
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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 Global Development Center (GDC) for the same. GDC participates, contributes and obtains inputs from various industry forums in the respective geographies. These interactions, combined with inputs from the field force, facilitate effective and timely understanding of market trends/needs. To achieve this, it conducts a structured analysis, industry landscape and country studies. Such efforts have helped the company to tackle the complex nuances of the dynamic business situation in the BFSI segment. It was able to cross sell various products as a composite offering and penetrated the niche markets like the Philippines.

Human Resources
Employees are the key contributors to the success of any business. In a knowledge-driven industry, they become more important due to their implicit knowledge. The company understands this and has created an excellent working environment and competitive compensation program to retain and attract the best people. A special emphasis for the training of employees can be seen. Initial learning program for trainees as well as continuous learning program for all employees has enabled the company to develop their skills and meet the changing requirements. For the purpose of training, it has set up a training facility with a well-equipped library and modern IT facilities and infrastructure, at each of the major offices. Apart from training, the employees 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 cultural integration among employees, it has formed a Cultural Integration Team (CIT). The team invites, discusses, proposes and implements ideas on cultural integration. Since the company is also into Mergers and Acquisitions (M&A), it has also set up a merger integration 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 useful information. It has enabled employees to develop their skills and enhance their competency levels to meet the changing requirements of the company. It also provides the latest information about the development and progress of the company. The company has also set up an organization-wide innovation forum to kindle the spirit of innovation among all the employees. As a dividend, Premia Insurance Broking eXchange (IBX), Indias first subscription and internet-based insurance broking software was launched.

Outcome of the Strategy

I 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
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Portfolio of Offerings
The hybrid strategy has helped 3i Infotech to build a right mix of offerings to suit a variety of needs across verticals (Figure 2). Offerings can be divided into three categories: 1. Software Product: The entire product portfolio has been acquired and valueadded over the past seven years significantly speeding up its time to market and scalability (Figure 2). It includes products like Premia (insurance management), Kastle (Secure Banking Solutions), Amlock (anti money laundering and fraud detection), iBoss (integrated broker office solutions suite), DataScan.Online (document management system), Awacs (stock exchange surveillance), MFund (mutual funds), Orion (Enterprise Resource Planning (ERP)), Xroadz (Enterprise Relationship Management (ERM)), Veda (recruitment automation solution), DataFlo (business process workflow management system). More information is given in Figure 3. Premia: The Companys insurance suite boasts of over 60% premiums in the Middle East through marquee clients like the American Insurance Group (AIG), Liberty Insurance, Qatar Insurance Company, Tokio Marine and Fire Insurance, among others. Kastle: The banking suite was ranked the second in selling retail lending software by IBS publishing, London, 2006. It also boasts of clients in excess of 100 with names like Standard Chartered Bank, Emirates Bank and Deutsche Bank, among others. MFund: The product for the mutual fund of the company has a 65% market share in India. Orion: The companys ERP offering is ranked among the top four ERP vendors in the Middle East and North Africa. 2. IT Services: It includes BPO, managed IT services, IT outsourcing, product reengineering, application rehabilitation, compliance consulting, packaged application implementation, Enterprise Application Integration (EAI), e-governance, R&T agency and fund accounting, data warehousing and business intelligence. Business Process Outsourcing (BPO): Being the registrar and share transfer agent for ICICI Bank for over 15 years, it has established the company credentials in both voice and non-voice based BPO services. It provides endto-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 services for organizations in varied sectors, such as banking, BFSI, manufacturing,
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Figure 2: Products Portfolio

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

Source: Annual Report, 2007

Figure 3: Solution Provider

Products Capital Market Services MFund

ADM Managed Services

BPO 3i Infotech has proved as One stop technology shop 20 software product IPRs and range of IT services
Source: Company, ICICI Direct Equity Research Report, 2007 (www.icicidirect.com/mailimages/3i_Infotech.pdf) 80 The IUP Journal of Business Strategy, Vol. VIII, No. 1, 2011

Premia

Kastle

distribution and retail, telecommunications, Media and Entertainment (M&E) and government, among others. These services help the organization in optimizing IT initiatives and frameworks across multiple locations and functionalities to improve business performance, decrease costs and alleviate risks. They are broadly categorized into: custom software development, product re-engineering, application rehabilitation, EAI, e-governance, data warehousing and business intelligence. 3. Solutions: Products supported by a layer of services enabled the company to grow rapidly. It is a key differentiator for the company (Table 3).
Table 3: Product Portfolio Fast Track Through Acquisitions
Banking Kastle Core Banking Kastle Universal Banking Kastle Treasury Kastle Risk Management Kastle Asset Liability Management Kastle Factoring Kastle Wealth Management Kastle Anti Money Laundering According to Skoch consulting, the only available estimate, the banking products market size is ~ $305 mn and growing at 16% annually. However we believe it could be significantly larger. Insurance Premia Properly and Casualty Premia Life Premia Health Premia Takaful Mutual Funds/ Asset Management Capital Markts

MFund/Asset iBOSS Integrated Broker Management (AM) Solution Office Solutions Suite MFund/Investor Services System (ISS) MFund/Dealing Rhyme/Sight Investment and Wealth Management Software Quasar Investment Administration Software InvTrac Investment Management Solutions AWACS Stock Exchange Surveillance System Altimis Stock Broking and Clearing Software Arrow Crest Solution

Premia Life

Fiscal Integrated Stock Broking and Accounting System

Premia Collaborator Premia Broker Premia Insurance Broking eXchange Opportunity to capture 1500-2000 small and medium size insurance companies in USA and UK companies.

The opportunity in this space is large covering the entire universe of mutual funds and brokers across geographies like Asia, Europe and USA.

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

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 Insurance: The Company provides strategic solutions for every insurance business line, giving the desired results to over 130 insurance organizations across the world. Banking: Banking solutions cover an extensive range of products that cater to banks and other financial services organizations. These also include valueadded services. Mutual Fund: 3i Infotech provides services for strategic as well as day-to-day operational needs of mutual fund companies involving operations, such as fund accounting, valuation, investment management, lending, investor services, dealing, pre-dealing, intent generation and order management. Capital Markets: 3i Infotech offers a wide gamut of capital market solutions for stockbrokers, traders, stock exchanges and regulators. These include comprehensive stock trading software suite, advanced warning and control system that handles all the critical elements of the surveillance process. Government: The Company had developed several projects for government department and organizations across a variety of areas like transport, urban development, land records and education, among various others. They undertook the Public Private Partnership (PPP) methodology to implement complex projects through a mix of Build-Own-Operate (BOO), Build-OwnOperate-Transfer (BOOT) and Build-Operate-Transfer (BOT) models. Telecommunications: Telecom solutions, along with a range of operations outsourcing (BPO) services for the telecommunications sector, focused on helping organizations achieve faster Return on Investment (ROI) and keep other operational expenses in control. Media and Broadcasting: 3i Infotech also offers media consulting services to media houses and broadcasting companies with best-of-the-breed products from leading global media and broadcast solution vendors, complemented with our expertise in system integration and project management services.

Revenue Trends and Financials

The hybrid strategy adopted by 3i Infotech has borne fruits and enabled it to enjoy its position as a global technology company with deep customer penetration across the world, with low levels 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 by the year 2008, experiencing an exponential growth in 2006, 2007 and 2008. The net profit . for 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 from 11% to 15% (2006-08).
82 The IUP Journal of Business Strategy, Vol. VIII, No. 1, 2011

The revenue generation is not from specific market or product, but is spread across different geographies and various segments. Over the years, the expansion is evident in emerging as well as developed markets; by 2008, Western Europe has become its booming market with 15% of the revenue generating from that region. With respect to growth in the business segments. Banking products constituted 14%, insurance 13%, capital markets 14% and ERP 8% of the total revenues respectively with a well-balanced revenue ratio of 1:1 coming from products and services (Figures 4 and 5).
Figure 4: Revenue Trends ( in mn) and Profit Margins
14,000 12,000 10,000 12,236

in mn)

8,000 6,000 4,000 2,000 417 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 4,240 2,661 2,320 2,920 6,708

50 45 40 35 Percentage 30 25 20 15 10 5 0 11 FY 2005 14 43 43

Profit Margin 47 47

16

15

FY 2006 Gross Margin

FY 2007 Net Margin

FY 2008

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

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Figure 5: Revenue by Geography and Segment

Revenue by Geography (FY 2006-08) 100 90 80 70 Percentage 60 50 40 30 20 10 0 FY 2008 USA FY 2007 Western Europe MEARC FY 2006 South Asia APAC 29 14 20 15 6 28 28 25 34 36 40 8 10 7

Revenue by Segment (FY 2006-08) 100 90 80 70 Percentage 60 50 40 30 20 10 0 Banking 14 13 14 FY 2008 Insurance 11 14 15 FY 2007 Capital Markets 15 18 FY 2006 Technology Services ERP BPO 39 42 48 12 8 9 9 6 13

Source: Annual Report, 2008 (www.3i-infotech.com) 84 The IUP Journal of Business Strategy, Vol. VIII, No. 1, 2011

In 2005, the company came out with Initial Public Offering (IPO) which was subscribed about 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 capital requirement is intensive. For working capital and acquisitions, the company has raised funds. For debt and equity mix purpose, the company has issued four times FCCB. These are zero coupon instruments having Yeild to Maturity (YTM) ranging from 6.8% to 7.05%. Currently, the companys 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 Ahead
Till now the strategy helped 3i Infotech to perform tremendously well, created derisked model in the form of geographical distribution of revenues along with a balanced spread of revenues across offerings. Today the company has robust platform in terms of range of product and IT services offerings, strong management team, industry specific knowledge and experience, global delivery model and a strategic focus on the Indian market, to start the next round of swift growth to become one of the top ten IT companies in India. But the sudden and sharp drop in market valuations of US mortgage-backed securities in mid 2007 has shaken the US financial system and economy. Till date, the emerging and developing economies have been less affected by financial market turbulence and have continued to grow at a brisk pace, majorly led by China and India. As 27% of the revenue is from the US market, the company needs to think from where it can compensate/boost the loss of growth. A recent report from Forrester Research Inc., states that global spends on IT goods and services will grow by 6% in 2008 after a 12% increase in 2007. But Software product and IT services/outsourcing is expected to increase by 8-9%. Main engine of growth will be Asia 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 in 2008, pulling down growth in the IT purchases both in the US and with major trading partners in Europe. Therefore, the increase in US and Western Europe is projected at 5-6%, 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, is projected at 18% and 20% respectively (Table 6). But the road is not that smooth to materialize the opportunities. The company is facing stiff competition not only from the service provider, but also from the IT product provider. Secondly, the competition is not only from the domestic players like I-flex Solutions (acquired by Oracle), Tata Consultancy Services, Wipro Limited and Infosys Technologies Limited, but also from the international players like Accenture, Temenos, Misys International, Sanchez, Applied Systems, Insurity, Computer Science Corporation, Fiserve, JD Edwards and Oracle.
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Table 4: Balance Sheet as at March 31, 2008

3i Infotech Limited Consolidated Balance Sheet as at March 31, 2008 As at Schedule March 31, 2008 I. Sources of Funds 1. Shareholders Funds A. Share Capital B. Reserves and Supplies 2. Minority Interest 3. Loan Funds A. Secured Loans B. Unsecured Loans 4. Premium Payable on Redemption of FCCB II. Application of Funds 1. Goodwill Arising on Consolidation 2. Fixed Assets: A. Gross Block B. Less: Depreciation C. Net Block D. Capital Work-in-Progress 3. Investments 4. Deferred Tax Asset (Net) 5. Current Assets, Loans and Advances A. Current Assets a. Sundry Debtors b. Unbilled Revenues c. Cash and Bank Balances B. Loans and Advances Less: Current Liabilities and Provisions A. Current Liabilities B. Provisions Net Current Assetss IX 2,448,61 574,31 3,022,92 7,161,59 20,562,66
Source: Annual Report, 2008 (www.3i-infotech.com) 86 The IUP Journal of Business Strategy, Vol. VIII, No. 1, 2011

( in mn) As at March 31, 2007

I II III IV V

2,305,35 5,135,29 7,440,64 102,13 1,078,65 11,578,87 12,657,52 362,37 20,562,66 10,031,01

1,562,99 3,397,44 4,960,43 19,02 1,519,31 4,955,59 6,474,90 11,454,35 5,783,37 2,298,00 927,81 1,370,19 183,62 1,553,81 1,02 373,69

VI 3,665,17 1,525,27 2,139,90 791,30 2,931,20 VII VIII 2,719,95 2,268,38 2,665,44 7,653,77 2,530,74 10,184,51 1,896,33 1,754,77 973,70 4,624,80 1,154,89 5,779,69 1,622,49 414,74 2,037,23 3,742,46 11,454,35 33,54 405,32

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 ( in mn) For the Year For the Year Ended Ended Schedule March 31, 2008 March 31, 2007 Income Income from Operations Other Income Total Income Expenditure Cost of Revenues Software Development Cost Selling, General and Administrative Expenses Total Expenditure Profit before Interest, depreciation and amortization Interest Depreciation and Amortization Profit Before Taxation Deferred Taxes (Net) Current Taxes Fringe Benefit Tax Mat Credit Entitlement Pertaining to Earlier Years Written Off Profit After Taxation and Before Exceptional Items Add/(less): Exceptional Items Profit After Exceptional Items Add/(less): Provision for Contingency Profit After Exceptional Items and Provision for Contingency Minority Shareholders Interest Net Profit After Minority Interest Earnings per Share Equity Shares, Per Value 10 Each Before Exceptional Items and Provision for Contingency Basic ( ) Diluted ( ) After Exceptional Items and Provision for Contingency Basic ( ) Diluted ( ) Significant Accounting Policies and Notes to Accounts X XI 12,052,62 183,05 12,235,67 6,454,13 406,13 2,643,16 9,503,42 2,732,25 505,12 243,96 1,983,17 7,13 231,13 22,01 (110,33) 1,833,23 1,25 1,831,98 1,831,98 1,831,98 66,24 1,765,74 6,553,17 154,55 6,707,72 3,521,75 263,73 1,446,12 5,231,60 1,476,12 208,99 168,84 1,098,29 9,20 32,04 12,21 1,044,84 1,044,84 120,06 1,164,90 (120,06) 1,044,84 7,36 1,037,48

XII XIII

13,40 12,65 13,40 12,65 XIV

8,00 8,69 8,99 8,69

Source: Annual Report, 2008 (www.3i-infotech.com) Case Study 87

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 dollar weakening 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 growth of 14% is expected. Asia Pacific The Asia Pacific market will grow at 14% Chinas IT purchases have been growing at 30%plus rates. While the Asia Pacific countries still export heavily to the US, domestic demand has been growing in China and India. A stagnant US economy in 2008 will slow but not derail both Asian economic growth and the growth rate for Asian IT purchases. USA In Software, the US market still dominates. The US market will represent 44% of the global software market 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.
Source: Annual Report, 2008 (www.3i-infotech.com)

Table 6: Domestic and Global Peers, (ICICI Direct Equity Research Report)
Company Domestic Peers I-Flex Polaris Nucleus Software Global Peers FNIS (USD) Misys (GBP) Temenos (USD) 3i Infotech 480 48 31 1166 554 50 38 1560 2.12 10.43 0.93 12.84 2.32 12.8 1.22 16.5 21.2 18.3 26.2 11.1 19.4 14.9 20.0 8.6 1.0 13.2 19.8 10.1 0.9 12.2 14.8 8.0 1.8 2.0 4.5 1.6 1.6 1.9 3.7 1.3 298 387 20.45 26.45 19.2 14.9 16.6 11.6 4.3 3.3 Revenue FY 08 2526 1143 FY 09 3245 1437 EPS FY 08 FY 09 43.55 9.1 55.65 13.7 P/E FY 08 37.1 13.7 EV/EBIDTA Mcap/Sales FY 09 FY 08 FY 09 FY 08 FY 09 29.0 9.1 24.9 6.6 19.4 5.0 5.3 1.1 4.1 0.9

Source: Company, Reuters, ICICI Direct Research Report, 2007 (www.icicidirect.com/mailimages/3i_Infotech.pdf) 88 The IUP Journal of Business Strategy, Vol. VIII, No. 1, 2011

With increasing competition in the IT industry, product innovation has been an important factor to sustain growth which 3i Infotech has to take care of. It is also very difficult for the companies to retain the talent pool due to high attrition rates as the growing MNCs prove to be lucrative opportunity for the professionals. Recent fund raising in the form of FCCB will dilute the Earning-Per-Share (EPS) as well as the controlling stake (Exhibit 2). Also giant MNCs act as big sharks in the ocean which are ready to engulf the mid-sized growing companies. With market-capitalization of around 1400-1500 cr, the company can become a probable target rather than an acquirer in the next round of M&A.
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 right to sell additional shares in a registered securities offering if demand for the securities is in excess of the original amount offered. The Green Shoe can vary in size up to 15% of the original number of shares offered. The term Green Shoe comes from a company founded in 1919 as Green Shoe Manufacturing Company, now called Stride Rite Corporation, which was the first company to permit this practice to be used in an offering. What is FCCB (Foreign Currency Convertible Bond)? A type of convertible bond issued in a currency different than the issuers domestic currency, in other words the money being raised by the issuing company is in the form of a foreign currency. A convertible bond is a mix between a debt and equity instrument. It acts like a bond by making regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock.
Source: www.wikipedia.org\greenshoeoption; www.investopedia.com\FCCB

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

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

Case Study

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