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New economy initiatives spell growth - Views on News from Equitymaster
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  • Jul 1, 2000

    New economy initiatives spell growth

    The new economy is doing wonders for India. It has provided the Indian entrepreneur with a new business opportunity, which is anticipated to grow rapidly. Indeed McKinsey has projected that the size of the software industry alone in India will grow to US$ 87 billion by 2008.

    In all this enthusiasm there are several companies that are making a concerted attempt to reorient themselves around this new opportunity, which involves software development, Internet and e-commerce. Among the leaders in this pack is Global Tele-Systems Limited (Global).

    Global Tele – Systems has come a long way from the days when it used to be a supplier of telecom equipment. The company, which later developed into a total telecom solutions provider is now in the process of capitalizing on this opportunity thrown open by the Internet revolution. In view of this it recently exited the consumer telecom business.

    In recent years the company has continued to generate growth by focusing on intellectual property rights (IPRs), development of software, e-commerce, call centres, engineering and project services. Indeed, the share of the software, Internet and e-commerce division of the company as a percent of total income has grown from 36 percent in FY99 to 51 percent in FY00. This focus has done wonders for its operating margins, which too grew to 33.1 percent from 23.1 percent in same period.

    According to its executive vice chairman, Mr. Manoj Tirodkar, “We are seeing growth in three major areas. One is call centers. We see that with costs of leased circuits going down, call center demand is going to surge. Second, in the IT-enabled services, engineering outsourcing, which will get support from offshore activities on the engineering front both from software and telecommunication. Third, again is the area that is not looked at much, research and development oriented outsourcing”.

    Global is betting big on its payment gateway, which is basically a service that will connect customers, banks and sellers on an electronic platform that will make it easier (and safer) to transfer funds. A payment gateway in simple words would enable the buyer and seller exchange payments (via a bank) over the Internet, automatically. The service is based on the prospect that there is tremendous potential for e-commerce in India. The company anticipates that its independent status will benefit it, as there would be no conflict of interest with any service provider. Already eight commercial banks have tied up with Global for the service.

    As regards the opportunity thrown up by the Internet, Global has clearly laid out its business policy. The company intends to be a service provider to dot.coms and B2B players rather than venture out in these areas itself. It sees great growth opportunity in these businesses but at the same time its projections are tempered by the fact that the Internet user base in India is still small (although growing very rapidly).

    Global is meanwhile not ignoring its core competency – engineering services. In view of the large investments anticipated in the sector in coming years, the company has decided to focus on providing telecom networks and telecom infrastructure services. Global has been able to make a successful transition over the years. And this has been aptly reflected in the company’s market capitalization, which has increased dramatically to Rs 49 billion from Rs 2 billion at the end of fiscal year 1997. Global, which till recently was just another hopeful in the new economy today finds a prominent place in the investment portfolios of mutual funds.

    However going forward the company is likely to incur stiff competition in all its areas of operations. Its first mover advantage will definitely help it in gaining a lead, but in view of the rapid changes in technologies this advantage may be negated. These factors may yet throw a spanner in the dream run the company has had over the last few years.



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