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“We target to acquire only those companies which provides synergies with our existing business”. - Views on News from Equitymaster
 
 
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  • Oct 25, 2000

    “We target to acquire only those companies which provides synergies with our existing business”.

    A gold medallist in mechanical engineering and industrial engineering Mr. Ganesh Natarajan has been at the helm of affairs at Aptech since 1991. Mr. Natarajan has had extensive experience in manufacturing, consulting and training. He is also the author of two McGraw Hill Books on business process reengineering. As the Managing Director of Aptech Ltd. in India and a Director on the Board of Aptech Worldwide he has spearheaded the growth of the organisation from Rs 100 m Indian training firm to Rs 4 bn global technology group spread across 36 countries.

    In an interview with Equitymaster.com Mr. Natarajan spoke of Aptech’s strategy in each of its division and the management’s vision for the company.

    EQM: How do you see the growth rate in education and training (E&T) industry globally as well as in the Indian context?

    Mr. Natarajan: Globally the E&T industry is divided into three-four classes. One of them is classroom training, which is growing at about 15-18% globally every year. The online segment of E&T industry is growing at about 60-70%. On the other hand in India, the entire E&T industry is growing at about 25-30% per annum.

    We have just launched our online portal, which we expect to grow at about 100% per annum over the next 5-6 years. In India, the growth rates are much faster in online training. The prediction is that almost 2 m new professionals would be required for the software industry. This indicates that growth for the Indian IT industry is much faster than the global industry since spending on education is increasing.

    EQM: What are the prospects of online training in view of the increasing competition?

    Mr. Natarajan: Competition in online training in India is comparatively less than globally. There are companies like DigitalThink, Smartforce globally which provide online education. But the basic thing for online training is from where the technology and content is coming and what is the delivery system. So if you look at the people who have really succeeded in this business, they had captive content like what Aptech has, nearly 165 people developing content with a very good delivery system. We use Lotus Learning Space and technology support that measures how fast you are able to deliver and how quickly you are updating it. So there will be hardly 6-7 players in the online training over the next 3 years. There are lots of start-ups today. However, the people who have good university partnership along with good technology, quick delivery and good content will be one of the world’s top 5 in online education.

    EQM: Please brief us about the global software, e-commerce and ERP industry and Aptech’s positioning as a software solution provider.

    Mr. Natarajan: Globally ERP industry is waning. I don’t’ think ERP implementation would grow in a big way. Today ERP is extended to e-enabling your existing ERP set up which in other words is called as extended ERP. There are more growth opportunities in extended ERP market. If somebody has already implemented the ERP system and would now need to build up the virtual e-commerce model linking the old system to the new, it is called as extended ERP. Integrating the old legacy system to the new provides lots of opportunities and it is one of the areas where we have specialisation. Although legacy maintenance is a low margin business but integrating the legacy system to e-commerce is the most profitable business.

    EQM: What is the rational for tie up with SAP and BAAN as an ERP implementer? What are expected margins from this business in future?

    Mr. Natarajan: We have tied up with BAAN primarily for implementation of ERP in the Indian market. But we have no formal tie up with SAP. There are multiple SAP implementers who are now working on extended ERP model. We are probably only people in India to offer this product, which e-links products to supply chain management. If you just do SAP and BAAN implementations I don’t see any margin improvement. This segment contributes merely 3% to our total revenues. However, our billing rates in this segment are 30% higher than the industry rates.

    EQM: Currently ACE, which contributes more than 80% to the total revenue from E & T business, is growing at a slow pace of 20-25%. The business faces stiff competition from NIIT and other small institutions. In view of this what is the outlook for this division.

    Mr. Natarajan: Although ACE is a volume driven business and margins are comparatively low, we expect the division to continue to grow at about 20-25% annually in the next three years. The average course duration in this division range from 1-3 years. In the current year ACE will contribute around 50% to total E&T business (80% for the year ended December 1999). Also we expect the contribution from E&T business as a whole to decline to around 70% in the current year.

    EQM: How will the company be able to maintain growth rate of 40-45% in the ARENA division, which is focussing on multimedia segment?

    Mr. Natarajan: Globally the multimedia industry is at nascent stage and it has a lot of potential to grow further. ARENA has established its brand very well in the domestic market and also plans to go globally in this segment. In the Indian market we do not have any major competitor apart from small local institutions. The courses offered by ARENA are positioned at premium. As a result the margins in this segment are as high as 50%. In India we have a market share of around 50% in the multimedia division and the division contributes around 25-30% of total business of E&T segment.

    EQM: In the ASSET business, which is also growing at the rate of 40%, what are the company’s future strategies?

    Mr. Natarajan: In this segment apart from offering corporate training we have also launched e-commerce courses during the year. Our eACCP course in the field of e-commerce is doing very well in the market. This business offer the highest growth opportunity and margins are also expected to improve in future. Currently ASSET division contributes around 10-12% of total revenues of E&T business. We will continue to launch new courses in this division to maintain its current growth rate.

    EQM: Kindly explain the future revenue mix and the expected revenues as a percentage to sales from software services business.

    Mr. Natarajan: In the current year we expect our software business to contribute around 30% to total sales. This year almost 50% of our revenues will come from e-commerce followed by 30% from Internet related/web enabling work and the balance 20% will be a mix of e-learning and knowledge management.

    EQM: Please throw some light on the business model of Knowledge Management (KM) division.

    Mr. Natarajan: Today very few companies provide knowledge management services. KM is actually building customer relationship with the efficient use of technology. The initial contacts with the customers are stored in a system, which can be used later on to provide much better services to the customers. We already have around 16 large clients in this segment including Ford and Royal Bank. We also have clients in Canada and Singapore. However most of our clients are situated outside India. The knowledge management services in India are at a very nascent stage and over a period of time it is expected to grow considerably. The billing rates in the segment are comparatively higher. We have developed a framework called Ontologic to provide KM solutions for intelligent customer query and response.

    EQM: How’ s Aptech’s onlinevarsity.com competing with NIIT’s netvarsity.com? Also brief us about the expected revenue contribution from this portal to the total turnover.

    Mr. Natarajan: NIIT’s netvarsity.com is comparatively an older venture. I believe Aptech’s onlinevarsity.com has grown much faster with its focus on a revenue based model. On the other hand NIIT has just launched its revenue model after being operative for more than 2 years. We have started with a revenue model and have tie ups for payment gateways. So we enabled the students and even the corporates to pay for the course online. We believe that we are at a more advanced stage of architecture for online education.

    EQM: Kindly explain the revenue model of BconnectB.com, which is incorporated through a separate subsidiary. How will the main company have synergies with this business? What kind of growth rates does Aptech plans to generate further?

    Mr. Natarajan: We have our online portal called BconnectB.com, which is established as an ASP for the manufacturing industry. The comprehensive supply chain collaboration links the organisation, its suppliers and distributors through our e-link product. Along with our ISP business we have invested around Rs 200 m in this business. The revenues from the portals will contribute marginally in the current year. However over the next three years we target to achieve revenues of around Rs 1 bn from these new ventures, which include BconnectB.com, newly launched TringTring.com and the online training business.

    EQM: What kind of overseas acquisition is the company looking for?

    Mr. Natarajan: During the year we have acquired the US based profit making company Specsoft for $9-$10 m. We have paid an initial amount of $3 m and the balance payment will be linked to the total earnings of Specsoft over the next two years. Aptech would utilise Specsoft’s expertise in embedded system, networking and web related technologies. We do not plan any big overseas acquisition since the major problems in such acquisitions are to integrate the company’s operations with your business and the legal formalities. Our target will be acquire only those companies which provide synergies with our existing business and at a price not more than 10 times forward earning of that company.

    EQM: Please explain us the marketing initiatives undertaken by the company during the year.

    Mr. Natarajan: During the year we have opened several overseas offices. Currently for the software division we have 6 offices in US, three in Europe and four in Asia. All the offices relating to training division are on a franchisee model where our investments are comparatively low.

    EQM: The company has targeted revenues of Rs 10 bn by year 2002. To achieve the target, it has to grow at a CAGR of 39%. In the past four years, the company’s revenue has witnessed a CAGR of 31%. In this view how does Aptech plan to achieve this target?

    Mr. Natarajan: Our software business, which is growing at the rate of 100% every year, will be the main revenue driver. Over the next three years contribution from software services to total revenues is expected to grow substantially which will also improve the margins of the company. I think we will be able to achieve a target of Rs 10 bn by 2002.

    EQM: Any books that have influenced you the most?

    Mr. Natarajan: My favourite books are “Competing for the Future” by CK Prahlad and “The Arc of Ambition” by Nitin Nohria.

     

     

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