PEs see gold in midsize Indian IT firms

Indian information technology (IT) companies, especially in the mid-tier segment, have seen a rise in private equity (PE) firms taking a stake in them.

Midsize IT service companies have attracted PE entities such as Blackstone, Carlyle, ChrysCapital, Bain Capital, The Baring Asia and others. And, PE-backed companies have seen faster growth, at a time when their large listed peers have slowed due to an uncertain market.

Take ChrysCapital. The Mauritiusbased PE entity has earned significant returns from companies such as HCL Technologies, Infosys and Mphasis in the past. In May 2013, it took nearly 4.5 per cent stake in Cyient for ~80-90 61.47 per cent stake from Promoter crore ($15 million). ChrysCap got nearly Entities. The company reported a little ~80 crore ($13 mn) for part of its more than eight per cent revenue stake through open market transactions growth in the 12 months to December a few weeks earlier. Its remaining 2016 and said it expects double-digit stake at Cyient is worth ~260 crore. growth in the current year.

Analysts say PEs come in with two Large IT companies such as major growth drivers — they fund at Wipro, TCS, Infosys, Tech Mahindra a time of business transition and the and HCL have at the same time other companies in their portfolio growth of six to eight per cent and help in new business. Some compare slow digital technology turnaround. the latter support to Tata Consultancy “PE firms bring medium to longterm Services (TCS) getting business from capital to fund geographic expansion, Tata Motors. Blackstone Advisors invest in building deeper technology India invested nearly $825 million in capabilities and, most April 2016 in Mphasis, with more than important, they also provide access to 60 per cent stake. their portfolio companies in getting

The company, analysts said, has new business to IT service firms. PE started showing some results, barring firms also bring in strong product technology initial hiccups, since then. The Baring capabilities, as they tend to Asia Private Equity Fund V, a fund operate innovative product companies managed by Baring Private Equity in various geographies. They do a great Asia, invested $389.4 mn in Mumbaibasedjob in getting Hexaware their Technologiesinvestee companiesfor a focused on creating value,” said Malay Shah, senior director at Alvarez & Marsal India. He says PE firms are also more efficient in capital allocation.

Compared with technology transformation journeys at large publiclylisted entities, PE-backed Hexaware Technologies, Cyient, Zensar Technologies, Tata Technologies, Mphasis and Intelenet have taken big jumps in terms of investment in new and digital technology expansion areas.

“PE firms strike a good balance in offering flexibility and creating value. Sound PE firms do not interfere in day to day operations, while still playing an important role in shaping their strategy, providing adequate governance and in creating value,” added Shah.

Apax Partners LLP had put $133 mn for a 23.22 per cent stake in Pune-based Zensar in October 2015. Zensar has made faster digital transformation and currently garners close to 36 per cent of revenue from digital technology services.

A close look at the market capitalisation growth of PE-backed companies and large Indian IT firms give a prospective picture for PE-backed companies. For large firms, the market cap has grown marginally and declined in the past one or two years; for PE-supported companies, barring a drop in the past one year, there has been a sharp rise.

“With deal size and terms are squeezing dramatically in IT services, the way of doing business is changing, starting from technology to people and geographies. That jump (of transformation) takes 36-48 months. In that time frame, companies have to invest a lot of money and PEs see that as a great opportunity of business transition,” said Sanchit Vir Gogia, chief executive officer and founder, Greyhound Research. He adds that large listed firms have a commitment to deliver quarterly numbers while driving change, unlike PE-led companies.

PE fund-driven growth does have challenges, too. “One area to worry about with PE-backed firms is the intense focus on margin over growth. However if the focus is on growing the company and reinvestment, there can be some great results. In a well-run PE model, the focus on less offerings and the concentrated investment in R&D might help give clarity to the differentiation. We do see that in some of the companies mentioned. However, to survive in the long run, you do need an innovation pipeline and these are often expensive,” said Ray Wang, principal analyst at Silicon Valley-based Constellation Research.

He adds that “the future will require more scale, more IP creation, and the ability to develop more innovative cocreation partnerships with clients”.