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"Our core competency is the management of professional employees" - Views on News from Equitymaster
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  • Apr 29, 2000

    "Our core competency is the management of professional employees"

    Dr. L. S. Kanodia, a Ph.D. in Management and Computers from the MIT, USA (1965-1967) and a Ford Foundation Fellow, is fondly known as the Father and the Architect of the Indian Software Industry for his several entrepreneurial initiatives.

    From pioneering Tata Consultancy Services (1967), this visionary with just Rs 25,000 established Datamatics (1975) and went on to become the Chairman and MD of one of the largest software services companies in India today.

    In an interview to equitymaster.com, Dr. L. S. Kanodia, CMD, Datamatics, spoke about the Datamatics group and his plans for the future.

    EQM: Could you please give us a background of the Datamatics Group of Companies?

    Mr. Kanodia: The Datamatics Group of Companies constitutes six operating companies out of which two companies, Datamatics Limited and Datamatics Technologies Limited are hundred per cent export oriented units. Datamatics Limited is into information technology services such as Satyam, Infosys and TCS. Datamatics Technologies is exclusively involved in knowledge management, which includes creating knowledge portals and data warehousing. The other four companies in the group are Datamatics Financial Services, who are in the registrars business and financial instruments processing, and is now expanding into financial software exports; Datamatics Information Technology Limited which is in the business of providing domestic software solutions, networking and automatic data capture (bar coding) and providing large security systems such as TV monitoring and surveillance systems. Datamatics Staffing Services is in the business of recruitment of top managerial staff locally as well as internationally for over twenty five years. Datamatics Direct Marketing is engaged in the business of direct marketing. Direct Marketing which is very popular in the US, is picking up in India involves creating segmented databases of individuals and corporates and selling products through the direct media, such as telemarketing and direct mail. It has more reach than television and other mass media. The common thread underlying all companies are that they are all service oriented and technology based.

    EQM: Could you inform us about the core competency areas of Datamatics

    Mr. Kanodia: Our core competency area is the management of professional employees and constantly motivating them. Our underlying technological strength is computer software and systems. The business areas have been bifurcated among six companies for the sake of better focus, because if all activities are carried out under one umbrella, focus is lost. For instance our Hitech Centre has been exclusively devoted to knowledge management and everyone here talks of knowledge management and nothing else. This gives you a sharp focus and a target. Otherwise you are looking at a moving target and achieving nothing.

    EQM: Could you please provide the composition of revenue in terms of geographical spread and product lines?

    Mr. Kanodia: The total group revenue is about Rs 2,500 m including our domestic and overseas operations which comprises two companies in the US, one in Germany, one in Japan and one in Australia. Overseas Revenue is equally spread geographically across Europe, Japan and the USA. The proportion of export income to domestic income is 60:40. Internet is a relatively new area for us. However in this company i.e Datamatics Technologies Limited 48% of the revenue is presently derived from internet services. Datamatics Limited is in the business of creating portals and e-Commerce sites. Our group software revenue from these internet related activities would be about 30%. I must clarify that we are not an internet service provider. It is only that we provide these services related to the internet and derive income from the same, such as e-commerce solutions.

    EQM: What is the current employee strength and how much is it expected to go up to?

    Mr. Kanodia: We have about 1,600 employees in the group. We have acquired an additional 3,00,000 square feet of space, which means we would be employing an additional 3,000 people in the next two years. We already have the largest facility in the Millenium Park, admeasuring 1,80,000 square feet. The current building which houses the knowledge park has 40,000 sq. ft and the building across the road that is under construction, has approximately 70,000 sq.ft.

    EQM: What is the attrition rate and what measures are being taken to retain employees and train them?

    Mr. Kanodia: We have one of the lowest attrition rates in the industry. The main reason for this is that we are PCMM compliant, which is compliance of the Carnegie Mellon Institute that our personnel policies are of the highest order; this is a reflection of the fact that we are very people oriented. In fact, we are the first I.T. organisation in the world to have become PCMM compliant. It shows that our policies are very mature and people friendly. All this has to be viewed in light of the fact that we did not even have an employee stock option scheme in place. We have an attrition rate of about 12% in comparison to the national average, which in my estimate is between 15% to 25%. In fact at senior levels, the attrition rate is virtually zero. We are a very employee friendly company and extend personal help to employees at most times.

    EQM: What are the future plans for Datamatics and how does it plan achieving them?

    Mr. Kanodia: The current item on our agenda is to take three of our companies to the public. Firstly we will be starting with Datamatics Technologies Limited for which SEBI approval is expected any day and the issue is expected next month. Then we plan to go public with Datamatics Limited and then Datamatics Financial Services Ltd. We are strengthening our overseas presence by acquiring overseas companies. We are very keen on employing adequate local residents in each of the countries where we have a presence. For instance we have German employees in Germany and Japanese employees in Japan. This ensures us more business and better rates at the same time. We are planning to increase our presence in e-commerce. We plan to get into new lines of business which includes e-commerce and e-books which are essentially books hosted on the internet and which are capable of being downloaded into special book like electronic devices.

    EQM: How many off shore development centres exist and how many exist in software technology parks?

    Mr. Kanodia: We have 16 units at SEEPZ and 8 units at NOIDA. This does not include the present unit which is registered with the Software Technology Park Authority of India and is a 100% export oriented unit and also does not include our facility in the Millennium Park which is the largest facility in Maharashtra, under a single roof.

    EQM: Does the company intend taking advantage of the announcements made by the government i.e permission to acquire overseas companies upto ten times of export earnings?

    Mr. Kanodia: Very much. In fact it is the chief reason why we want to go public. In fact the Export Import Bank of India has promised us full support in financing such buyouts, if required. This will enable stock swaps. This will also facilitate employee stock option schemes for our employees, which will be very useful in retaining them.

    EQM: How much will the recent government decision to tax export income progressively over the next five years affect the company?

    Mr. Kanodia: All our units lie in the zones that are exempt from tax. However I feel the government will roll back the present proposals relating to taxing units in export/technology parks, as it adversely affects the new entrepreneur. The present policy states that new entrepreneurs would be immediately taxed and old entrepreneurs would continue to enjoy a ten year tax holidays. This anomaly has to be corrected.

    EQM: Are you happy with the incentives provided by the government for the IT industry and what is it according to you that needs to be done further?

    Mr. Kanodia: I think the government has done more for the IT industry than any other industry and whatever recommendations have been made by the association have been more or less accepted by the government. I must compliment the government for its positive attitude. There are still a few areas which need ironing out, one of which is the telecom industry. For India to seriously become a major serious long term player, the reliability, quality and price of telecom in India must be improved. We cannot have a dichotomy between India and the rest of the world. The good news is that the government seems to have woken up to this issue . I spoke to a few people in the Government who seem to be taking action with regard to bandwidth, pricing etc. The other vexatious issue is that of taxation because we are not used to global mergers and amalgamations. For e.g Daimler, a German company and Chrysler, an American company have merged . You cannot conceive of an Indian company merging with an American company and continuing to co-exist. The laws are very hazy on that. So these seeming non issues of the past need to be sorted out today before the Income Tax Officer start serving tax notices.

    EQM: Tell us about your forthcoming public issue and why has the company been so slow to come out with an issue despite being one of the earliest entrants in the industry?

    Mr. Kanodia: The company did not come out with an issue so far because quite honestly it did not need the funds so far. Now there is a genuine need for going public. The biggest reason is for the sake of introducing an Employee Stock Option Scheme as you cannot get good employees without ESOPs. Overseas acquisitions become much easier and going to the NASDAQ will facilitate dollar funds. The entire industry has really taken off only in the last few years. Now of course IT drives the stock markets and there is a lot of pressure to produce good results. Thus while we have been cautious thus far when there is a need we are going public.

    EQM: What is the current SEI CMM Level for the company and what are the chances of upgradation?

    Mr. Kanodia: We are ranked at level 3 and are likely to be upgraded to Level 4 shortly. We have concentrated on ISO certifications and PCMM certification, which I have alluded to above. Attaining Level 5 though fashionable, has its own disadvantages as it restricts the style of operation . If a customer is at Level 2 and a supplier at Level 5 creates there is a mismatch. Its hunky dory to be at Level 5, but it is not a necessity. It's not necessary that every company should sell a Rolls Royce. Sometimes it becomes necessary to sell a Fiat.

    EQM: Could you tell us about your initiatives specifically in the areas of e-commerce, m-commerce, CRM, SCM and networking?

    Mr. Kanodia: We create e-commerce portals. We have a wonderful product whereby you can buy and sell spare parts by way of the web. This is a unique product as the spare part can be seen on the screen by inputting the spare part number . It has drill down facilities and is image driven and can be used by any manufacturer as spare parts are universal whether it is a car or a cellular phone. We also implement e-commerce solutions for our clients. In the area of Customer Relationship Management (CRM), we have a tie up with Siebel who are the leading exponents of CRM in the world. We have also tied up with three of the largest software companies in the world i.e Computer Associates, CSC and EDS. On the supply Chain management (SCM) side, we are negotiating tie-ups with two or three of the largest companies in the world. We are also into embedded software. Most machine that we use today are dumb. They will gradually become intelligent, for instance, Cell phones are intelligent to some extent as they can recall the last few numbers called . Cars also have inbuilt microprocessors. Gradually, all gadgets will become intelligent. Personal computers will slowly decline as embedded machines come up. The age of the intelligent machines has arrived on us. It's a new area where a lot of investment would have to be made initially to develop such intelligent machines.

    EQM: Do you think there is an oversupply of software professionals in India or is it likely to happen in the near future?

    Mr. Kanodia: The demand for highly qualified software professionals shall always continue to exist. Such engineers from IIT's and other premier institutions shall always be in demand . It is only the private diploma holders who may become redundant. The more serious education institutions should be promoted by the government.

    EQM: What are your views on convergence?

    Mr. Kanodia: It is going to spread its tentacles rapidly all over the world. Television, Telecom, Cellular Phones, Embedded machines are all going to converge more and more. This convergence has already started in the form of the Internet. People have an aversion to cords and wires and this is borne out by the remote controls for televisions, and cordless and cell phones. In Japan, for instance due to an increase in bandwidth to 2 gigabits, people will be able to download music and movies to their cellular phones. So we are going to witness a sea change in this area.

    EQM: Who are your immediate competitors?

    Mr. Kanodia: All companies have their own niche markets. Wipro for instance is focussing on Telecom. So in a generic sense we might be competitors but not otherwise. For instance in knowledge management we have virtually no competitors. Most of us have created our own niche markets . We are one of the largest privately held IT group of companies and a major player in the Information Technology market.

    EQM: Who has inspired you the most in your personal and professional life?

    Mr. Kanodia: I have been inspired by the holy Bhagwad Gita which says, "Do whatever you do well and with single-minded devotion". My personal life is very simple and am very fond of nature i.e flora and fauna. I am a very down to earth person.


    Particulars (Rs m) FY00 FY99 FY98 FY97 FY96
    Income from Operations 256.2 164.3 82.7 68.6 59.4
    Other Income 17.8 5.3 4.6 2.7 0.5
    Total Expenditure 154.3 99.3 59.1 45.7 31.6
    Operating Profit 119.7 70.3 28.2 25.5 28.3
    Depreciation 7.3 3.6 2.3 1.0 1.8
    Profit before interest and taxes 112.4 66.7 25.9 24.6 26.5
    Interest 4.5 1.3 3.3 0.8 0.3
    Profit before taxes 107.9 65.4 22.6 23.8 26.2
    Taxes (including tax on dividends) 5.1 1.9 1.3 3.4 0.2
    Net Profits 102.7 63.5 21.4 20.4 26.0
    Prior Period - Excess/(Short) Prov. (9.8) (0.0) - 0.2  
    Dividends 8.6 3.8 - 3.2 2.4
    Earning per Share (Rs.)          
    Before split @ Rs.10/- per share 6.5 19.5 6.7 6.4 16.2
    After split @ Rs.5/- per share 3.2 9.8 3.3 3.2 8.1
    Equity Capital 152.2 32.2 32.0 32.0 16.0
    Preference Share Capital 7.8 7.5 - - -
    Reserves 180.7 136.0 53.4 32.1 30.8
    Net Worth 328.1 167.6 85.0 64.1 46.8
    Fixed Assets 188.0 38.1 22.2 11.0 7.2
    Investments 10.1 10.5 13.7 12.2 0.9
    Net Current Assets 249.0 177.3 56.1 45.5 38.7



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