Value Creation Calls For The Right Environment

While emphasising on the importance of a conducive environment for value creation, Anil Patwardhan, Vice President and Head - Corporate Finance and Governance, KPIT Cummins, traces the role of the IT sector in creating wealth across spectrum, in a conversation with Sagar Lele.

Anil Patwardhan
Vice President and Head,
Corporate Finance and Governance, KPIT Cummins

What is your perspective on value creation?

Value creation is like a large canvas consisting of a number of stakeholders and I consider this macro perspective to hold importance. When we look at customers, our value proposition lies in how we make it visible to them. We work on the processes and communication plans which will help customers understand our value proposition. 

When I look at investors and shareholders, working consistently on the topline and bottomline does not alone take care of value creation from their perspective. What they need to know further is what business model we are following, how sustainable it is and whether we will be able to deliver value in turbulent times. Visibility and a connect with investors is very important, demonstrating what business model we would like to follow and how that is relevant with the current competitive and business environment is crucial. 

I would also look at employees in terms of whether we really provide them a career progression path, and enough challenging opportunities, which are mainly driven by technology trends. 

Then when I look at the overall regulatory authority, we definitely need government support when we do business. So what is important is to ensure that we are always on the right side of the law. It is important to check how we guide the compliance processes and do business in a fair manner. All this will lead to sustainable value creation. 

When I look at bankers, we have to see bankers as our partners in growth. Whenever we look at growth - organic or inorganic, we have to look at investments in geographies and in amenities. We definitely need support from the institutional lenders and bankers as our partners. How do we sort this out and build credibility in order to convert this relationship on a strong foundation? We make our processes visible to them, we maintain enough transparency. All this means value creation for me in terms of bankers. When we look at the M&A opportunities for us based on our strategy naturally we don’t encourage the founders of the target companies to sell their stake and go away. We encourage them to work together, we treat them as a partner. We jointly treat values and then we actually leverage their strength by providing them with other roles in the KPIT organisation. 

So suppose, I am acquiring a USD 10 million company but the person is very technology driven, then I would like to provide him with a much larger role in KPIT to drive certain technology trends. We look at M&A also as an opportunity to widen our leadership team, things to our experience and knowledge base. So that is what value creation means to me from an M&A perspective. 

Do you think the Indian companies have succeeded in creating value? 

When I look at the Indian companies in terms of whether they have succeeded in creating value, I see many examples. IT companies have been successful in creating value in India and giving it a unique identity.

They have become credible enough to cater to their customers as knowledge partners. We can provide value added services to customers, understand their business issues and go back to them with the right solutions and focus on innovation. The industry has also contributed by way of very strong earnings in foreign currency and helping the balance of payments situation. In the last 10 to 15 years, the IT industry has continuously contributed to export earnings growth.

There are many companies that have focused on exports, even in sectors like manufacturing. These companies understand the global environment, and are a part of minutely starting a global trend. This impacts a company’s operations and resultantly its profitability. I think responding to these challenges has been very proactive.

Have shareholders reaped the benefits of capitalism in India? If not, what has been the real reason for this globally acclaimed ecosystem to have failed in the Indian context?

Shareholders/the investment community is well-informed and educated group today. They have a better understanding of various sectors, companies performing well, global macro environment challenges and I think they have been able to relate to their strengths, weaknesses and opportunities. They have identified the right investment opportunities at various stages – pre-listing, IPO, de-listing. All these investments are happening at various stages of a journey and they have been rewarded properly. 

These investment decisions have been based on their risk appetite. Anybody cannot come in as an investor at a pre-listing stage. It needs a lot of strong research and conviction to assure that this is the right investment opportunity for them. It all depends on the risk appetite of the investor. There have been many examples where people have got rewarded for their investment decisions and the research analyst community has contributed significantly in this journey. The entire capital market is being supported by knowledge partners like these. We thus have a better understanding of the business of companies, their future prospects and of their business models. We can thus evaluate which business model is better. 

I strongly believe that shareholders have reaped the benefits based on their skill set. Those who are sharply focused are aware of the evaluation of a company and therefore identify the right opportunity. 

What do you think should be the government’s role in value creation?

There are three to four aspects that the government needs to address consistently.

On the policy front, there is no going back on whatever has been planned for the long term. We should avoid any amendments or changes in the policy environment which has a retrospective effect. That gives out a very bad message and it causes irreparable damage.

Secondly, the momentum of liberalisation has to continue. Whichever government comes in, we need a very strong finance ministry. The portfolio has to have an understanding of the global markets and the environment and liberalisation should be carried on.

Continued focus on the current account deficit (CAD) is needed. This area creates concern among global investors. If we manage our current account deficit well and maintain it below the target low, it will create a conducive investment environment from an investor’s perspective. It will drive the exports’ growth which will drive investments, the capital markets and thus help the overall macroeconomic environment. When the sentiments are positive, you will see a cascading effect. Things then start falling in place. The government of India with its corporate citizens is capable of creating such an environment.

I strongly believe that the Indian economy will be back on the growth path and I won’t be surprised if we once again witness a strong growth in the medium term. A strong demand generation is our strength, we have a huge population and hence demand generation in the domestic market is not a concern at all. In fact, it will only multiply.

The right policy environment and a continous focus on liberalisation will drive this momentum.

Where do you see the India economy in the next five years?

I strongly believe in the younger generation. They are aware of the realities, and of what they need. I am sure people will put them in the right places. When I look at how our company will get benefitted because of this environment over the next five years, I would say that we have demonstrated a very good growth over the last three years. We have been on the growth path post listing.

The focus is always on the right investments followed by the right business strategy and driving growth – organic as well as inorganic. I have been involved in nine or 10 different deals and every single deal has been made to fit perfectly in our strategy and has leveraged our operational position.

The company is travelling today on a billion dollar roadmap and we see ourselves reaching there by 2017. We are very close to the half billion dollar milestone. When we close the year FY13, we will be a 410 million dollar company. So I think, we are travelling on the right path confidently and growth will be driven by the bottomline because we have always looked at EPS growth. We ensure this growth without compromising on investments in R&D, through which we have built new offerings based on changing technological trends and we will continue doing so.

But the IT sector has been very dynamic over the years and how have you been fitting your strategy, and managing growth in this rapidly evolving scenario?

We have focused on the verticles of automotive, transport, manufacturing, energy and utilities. What we need to understand is the challenges that our customers are facing with respect to these verticals. Do we have the right offerings and the right solutions for our customers and do we understand the changes happening in the market place from a customer’s perspective? So long as we are completely aligned with these realities, we will be able to give the right solutions and I think we should be good to ride the wave of growth. 

Today, the macro environment is posing a challenge to all the players. We have to be with the right customers, the right verticles, right geography and built robust systems which will continue to deliver value to our customers. When we are able to deliver on these lines despite the market challenges, I think we should be able to continue to perform.

How do you see the overall IT sector panning out in the next five years?

Without IT, it is difficult for any sector or vertical to survive. We have to go back to our customers with the right solutions, we have to understand their business issues, their business plans and their IT investment plans. We need to understand why these investments are happening, what objectives have been set and whether we are able to deliver on those lines. So I think things are only going to move up, because the dependence on IT will only increase, it will never go down in the future.