IGATE GLOBAL SOLUTIONS: Acquisitions Yet to Bear Fruit

Consolidation in the Indian software services sector has now become a key
strategy for future growth. However, the returns from these acquisitions are yet
to be fully reflected in the financial performance of companies. This is partly
due to the fact that many of the acquisitions have been early stage companies
and acquirers are now investing in these companies to achieve sizable revenues
and profits. Also, there are significant costs associated with M&A and these
dampen profitability in the initial period of the acquiring company.

Among the companies that have been quite aggressive in the M&A arena is
Bangalore-based iGATE Global. Recently in the news for the induction of Phaneesh
Murthy as the CEO of the company, it remains to be seen how rapidly the new CEO
and the recent acquisitions help the company to show better performance.

Headquartered in Bangalore, iGATE Global Solutions is a subsidiary of
US-based iGATE Corporation and is the renamed Mascot Systems. The company was
incorporated on June 23, 2003 vide a fresh Certificate of Incorporation.
iGATE Global is present in 12 countries and has development centers in India,
US, UK, Canada, China and Malaysia. In the past five years, the total income has
grown at a CAGR of 75% to Rs 420.9 crore, whereas its net profit has risen at a
CAGR of 55% to Rs 45.4 crore.

The company’s services include consulting, enterprise data
management and data warehousing, business intelligence and analytics, design,
development, system integration, package evaluation and implementation,
re-engineering and maintenance. iGATE claims that it focuses on optimizing its
clients businesses through a combination of process investment strategies,
technology leverage and business process outsourcing and provisioning.

The financial year ended on March 31, 2003, wherein the
revenues amounted to Rs 420.9 crore as compared to Rs 407.4 crore, up 3.3%. Net
profit for the fiscal was Rs 28.4 crore as compared to Rs 45.4 crore for the
financial year ended March 2002. Offshore revenues increased by 13% in FY 2003
and contributed 30% of operating revenues during the year compared with 24% in
the previous year. Revenues from North America contributed 72% of the revenues
amounting to Rs 304.4 crore followed by Asia Pacific and Europe contributing 17%
and 11% that amounted to Rs 71.6 crore and Rs 44.9 crore respectively. GE
contributed 51% of the total revenues earned during the year from 53% last year,
suggesting dilution of client and revenue concentration.

During the last fiscal, iGATE Global Solutions entered into a
definitive agreement to buy out GMR Group’s majority stake in Quintant
Services, which offers services like consumer credit underwriting and
processing, commercial credit processing and claims and mortgage processing, in
a cash deal to augment the former’s domain expertise and strengthening its
presence in the financial services segment. iGATE Global agreed to buy GMR Group’s
51% stake in Quintant for Rs 869 million. The company also intends to acquire
the balance equity in Quintant contingent to certain conditions being met.

For the third quarter ended December 2003, consolidated
operating revenues were sequentially lower by 1.8% at Rs 145.5 crore compared to
the preceding quarter and y-o-y the revenues were up by 46%. The company
reported a loss of Rs 2.7 crore for the last quarter as compared to profit of Rs
0.7 crore and Rs 3.6 crore sequentially and y-o-y respectively. The IT service
business revenues contributed 96% of the total revenues earned during the
quarter, which amounted to Rs 137.0 crore as compared to Rs 140.4 crore
sequentially, down 2.45%. The ITES business revenues amounted to Rs 5.9 crore,
up 15% as compared to Rs 5.1 crore earned in the immediately preceding quarter,
contributing the balance 4% of the revenues. iGATE’s onsite activities
contributed 73% of the total IT service business revenues, amounting to Rs 99.4
crore, whereas the balance 27% was contributed by the activities conducted
offshore amounting to Rs 37.6 crore. Revenues from the IT services business in
Europe saw a 10% sequential increase amounting to Rs 15.2 crore, whereas
revenues from the North American and the Asia Pacific regions amounted to Rs 106
crore and Rs 15.8 crore, declining 3.8% and 4% respectively.

iGATE acquired Bangalore-based IdeaSpace Solutions for a cash
consideration of Rs 76.7 million (approx. $1.7 million) in return for IdeaSpace’s
information technology solutions and services business. The acquisition added
170 employees, many of whom are specialists in banking technology and
operations.

iGATE entered into a strategic alliance with the US based
Concours Group, which specializes in managing human and information technology
resources for user companies. iGATE would make an equity investment of
approximately $1.8 million into the company.

iGATE recently bagged a $20 million IT outsourcing deal from
ING Vysya Bank, a banking institution and part of the multinational financial
services company ING Global to assist them in entire value chain right from
hardware identification to procurement, to defining and implementing the
technology strategy for the bank. The company will also take the responsibility
for all the data center operations, systems and network management and local or
remote support at ING Vysya locations. This five-year deal is due to the
acquisition of the IdeaSpace business, which has brought in ING Vysya Bank as
iGATE’s client.

iGATE also entered into a five year deal with US based
mortgage business and retail banking company, Green Point Financial Corporation,
wherein the former will manage selected parts of the latter’s back office
processes helping them in enhancing their efficiency and operational excellence
as per established service level agreements. The deal is worth $22 billion and
Green Point Mortgage’s overall strategy is to transform itself into a virtual
enterprise to take on competition more aggressively.

The company’s employee strength as on December 31, 2003
stood at 3316, which includes the billable employees and the support staff.
During the quarter ended December 2003, 157 employees were added to the resource
base. 75% of the employees are involved in the company’s IT services business
whereas the balance 25% are with the BPO business. 70% and 30% of the employees
are involved in activities conducted off shore and on site respectively.

The company’s third quarter results were disappointing and
while it expects to significantly improve topline and bottomline growth in the
current year, we believe that margin pressure on margins will continue impact
its operations in the medium term.

iGATE currently trades at Rs 210, discounting the projected
March 2004 EPS by 64 times and June 2005 EPS by 11 times. The share price rose
sharply with the induction of Phaneesh Murthy as the CEO but has since fallen
both due to disappointing third quarter results and the general decline in IT
stocks. Market Performer.

Sushanto Mitra
is the founder of Technology Capital Partners

The views reflected here are of the author and not of this publication. No
liability is accepted for losses based on the information presented here