u 54 uJuly 6 -19, 2015

Busi n e ss i n di a u the m aga zi n e of the cor por ate wor ldCorporate Reports

3i infotech is facing probably the bleakest period in the firms history. in a way, it is facing something of an existential crisis. prospects have never been dimmer even during 2008-12, when the com-pany was hit hard by the slowdown in the us economy and eurozone crisis as, around that time, nearly 75 per cent of its revenues were from its overseas operations.

the company has been haem-orrhaging over the last four years. in fy15 it recorded a loss of `976 crore the highest in the history of the company. the loss on a consol-idated basis was `357 crore in fy12, `503 crore in fy13, and `357 crore in fy14. the steady erosion in profit was largely due to the high interest expenses and depreciation charges. the net worth of the company was negative.

more recently, being forsaken by its promoter icici Bank, which sold large chunks of its holding in 3i info-tech and reduced its stake to 3.27 per cent from 17.93 per cent before the company went public in 2005, was a big blow. the implicit criticism of icici Bank, the financial institu-tion that once backed 3i infotech, but eventually deserted it, isnt lost on anyone. icici Bank is just one of the bankers today, as it describes its holding in the company to the stock exchanges, seeking to distance itself from the company.

such a state would have been inconceivable 10 years ago. 3i info-tech was then one of indias highly promising companies, having accom-plished a stunning record of prod-ucts and market expansion, which in turn led to impressive earnings. it had the vision to invest in foreign markets like the us, emea, apac and europe to drive growth. it even built successful products for the banking

and financial institutions that would be adopted by top organisations and change the way companies operate. as such, one could even compare it with citibanks software unit, which later became i-flex solutions.

as a global financial institu-tion, the bank would, in the normal course, buy and sell shares includ-ing holdings arising consequent to corporate debt restructuring (cdr), says a person close to the company, underplaying icici Banks abrupt move in quickly offloading its stake. therefore, the divestment of shares in 3i infotech could be a part of this process.

Filtering the problemsicici Bank had founded 3i infotech as icici infotech in1999, with the intent of creating a standalone it company that would focus on bfsi (banking and financial services) products and services. in the early years, its growth strategy, largely fuelled by using products as an entry-level drive, was backed by associated services around these offerings. acquiring software products hastily mainly in the bfsi space, with borrowings from banks to enable faster-go-to market, worked

well for a while. however, it grounded the company due to recession in the us and the eurozone crisis.

3i infotechs predicament comes down to this: the company could not dominate other regions to get a steady stream of income to make up for the loss of its key markets. it also has been facing a steep rise in the working cap-ital requirements while continuing to sustain the fixed outlay of the opera-tion, mainly employee cost.

another major problem was avail-ing short-term loans on a regu-lar basis to meet its working capital requirement, which it was unable to have refinanced. this implied having to raise funds repetitively through foreign currency convertible bonds (fccb) in multiple tranches.

the subsequent downgrading of its score by the credit rating firm, crisil, further disrupted day-to-day operations and its ability to service its rising debt obligations, amount-ing to `2,380 crore. still, it got some advantage when, following a restruc-turing plan approved by the cdr mechanism of reserve Bank of india, the company could convert a portion of the outstanding debt and interest cost into equity.

Change of guardto overcome this dire situation, a new management team came in place in 2012, when madhivanan Balakrishnan took over as managing director & global ceo, 3i infotech, moving from icici prudential life insurance co, where he was execu-tive director. since the management change took place, the objective has been to address the debt burden issue together with a strategy of protect-consolidate-grow, to make the com-pany profitable within a period of three years, said madhivanan.

three years later, 3i infotech is still weathering survival storms. non-fru-ition of sblc (standby letter of credit) proposal and consequent inter-est rate benefits, high rates of bor-rowings at 14.75 per cent and delay

Struggling to stay aliveIll-conceived strategies lead to the fall of a leading IT company

Madhivanan: exploring all options

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u 55 uJuly 6 -19, 2015

Busi n e ss i n di a u the m aga zi n e of the cor por ate wor ld Corporate Reports

in conversion of rupee debt to fcnr (b) debt by cdr bankers are some of the reasons the company cites for its collapse.

the company has now pinned its hope on finding an agreeable resolu-tion for the debt that the company is having to burden. it is seeking a strategic partner for any specific part of the business as one of the options, along with evaluating other feasible alternatives.

though clients may have migrated to more successful players, its bank-ers and lenders have not followed. in fact, the company continues to rely on its cdr bankers for business, some of which are also the largest stakeholders, to leverage the dual objectives of revenue generation and contribution to debt reduction. how-ever, this initiative has met with little success. ironically in spirit of having a leading financial institu-tional as its promoter its main prob-lem, at least on the surface seem financial.

we sincerely believe that 3i info-tech has a strong operating business model, with a core set of committed clients, says madhivanan, project-ing an optimistic future. and we are reasonably confident of arriving at a mutually beneficial financial and organisational restructuring model with our stakeholders.

as 3i infotech continues its fight to sustain its operations, it faces the risk of attrition of key people. it has stepped up focus to retain talent by means of assigning challenging and fulfilling roles. some of these mea-sures have already started showing desired results in the current year. our strength over the last three years has been the stability of the management team and their belief in the value that we deliver to our cus-tomers, says ashish kakkar, global head, hr.

at this point in 3i infotechs evo-lution, the company has restruc-tured its management team, driven by a conviction that the success of all business strategies ultimately comes down to execution. the com-pany has recruited a leader from out-side r.V. ramanan as president & chief operating officer, to focus on

and drive the growth of the products and icici Banks investor services. i look forward to moulding 3i infotech into a vibrant and growing organ-isation that builds on its products and domain strengths in providing reliable and innovative it solutions to its clients, says ramanan.

rakesh doshi and uday reddy, who between them will lead the products delivery and customer engagements respectively, support ramanan, who comes in after a long stint in hexaware. meanwhile, the multi-faceted padmanabhan iyer, cfo, will look after the services side of the business.

Products to dominatethe company is now betting on its bfsi suite of products, combined with the erp offering, and finding ways to bundle them to its active customer base. given the companys wide foot-print of customers across the finan-cial industry segment, it expects a reasonable level of business growth to happen through fresh licence upgrades and increase in the number of licences.

3i infotechs debt strategy is also guided by the understanding that the issue could be handled by restruc-turing or conversion to equity that would ensure growth and reduce overall losses. Bifurcation of debt and capitalisation may not be ruled out, admits madhivanan. in this regard, one of the options the com-pany is exploring is that of separate entities for the products and services, to ensure that the respective busi-nesses will become self-sustainable and profitable.

when revenue from 3i infotechs international operations plunged, the company, with support from its

lenders and bankers and with the approval of cdr-eg, identified three offshoots as non-core subsidiaries for divestment: u professional access, one of the iden-tified subsidiaries, which 3i infotech sold to zensar technologies in 2015; u rhyme, the second of the non-core businesses, which was acquired by objectway technologies, italy; and u locuz enterprises, its third ancil-lary unit, which the company is now scouting a buyer for.

the proceeds from these divest-ments are helping cut the immense debt liabilities.

this has given us the much-needed elbow room to ensure that business operations stabilise and improve, says iyer, acknowledging the support of its customers, lend-ers, employees and vendors, who have stood by the company to get this far.

now, theres another conjec-ture about 3i infotechs future, one for which evidence began to mount in June 2015, after the stock that quoted at a low of `2.18 in may 2015 swiftly scaled to `5.70 by end of June 2015, on reports of a buyout, even as the company denied this. there has been no specific development, says madhivanan clarifying the matter. the company and the cdr lenders keep getting proposals from various interested investors, which are under evaluation by the cdr bankers.

with a path full of challenges, how will 3i infotech ensure that it continues to exist? the company knows that, if it stays focussed on its operations to prevent stakeholder value erosion, it has a chance to come out unstuck.

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Kakkar, Iyer and Ramanan: focussing on growth