India's i-flex aims to raise $200 million in dual listing IPO

i-flex prepares for IPO in the US and India.
I-flex Solutions, one of India's top software companies, plans to raise as much as $200 million in an initial public offering (IPO) of its shares in the US and India as it seeks transform itself from an Indian company that exports overseas to a global company that happens to have factories in India.

The Mumbai-based company, which provides software for financial institutions, was founded nine years ago with the help of a $1 million investment from Citicorp. Today Citicorp owns 48% of the company. I-flex says it hasn't yet chosen a bank to underwrite the offering, saying it feels no obligation to favor Salomon Smith Barney, Citicorp's investment banking arm.

So far Indian software companies such as Infosys and Silverline Technologies have had a relatively easy time raising public money. That may not continue. Earlier this month Wipro, India's biggest software company by market value, was forced to cut the price of its American depositary receipts by 18% amid a global sell-off of software stocks. It succeeded in raising $113 million, less than the $168 million it had hoped for. That doesn't deter i-flex, which is hoping an overseas listing will help raise its profile globally.

"In the first phase of our growth we were focused on emerging markets," says Rajesh Hukku, i-flex's chairman. "Now we're beginning to enter Japan, the US and Europe. That's where we see the biggest growth for us going forward."

The company began to attract international attention with the launch two years ago of a suite of packaged banking software called Flexcube, which allows banks to automate their back office systems. Flexcube technology can be bought in parts or in its entirety and can cost up to $15 million to license and install. In the first year of its introduction Flexcube went straight to ninth place in research house International Banking Systems sales league table. In 1999 it shot to second place, making it the second most popular back-office banking system in the world.


Now the company wants to leverage that popularity by expanding into more developed markets. Hukku has moved to New York and he plans to ship managers to other key centres around the world. Earlier this year the company signed a $5 million deal with Japan's Shinsei Bank, one of the biggest transactions by an Indian software company in Japan. To date, Flexcube has been adopted by 40 financial institutions in 25 countries.

It's a profitable business. In the fiscal year ended March 2000, i-flex posted a net profit of  $15 million, or $1.80 per share, on revenue of  $45 million. In the previous year profit was $10.9 million, or $1.31 per share, on revenue of  $31 million. It has no debt and has cash in the bank. It also has reserves of $4.4 million. If it succeeds in raising $200 million from the public it will have more than $404 million in the kitty, which it will use to expand internationally.

What's driving i-flex's growth, says Hukka, is the gradual deregulation of the financial sector and the convergence of banking, brokerage and insurance operations. Functions that were previously handled in separate divisions are increasingly being integrated to provide customers with tailored packages that comprise a range of products; and the internet is spawning an entirely new kind of bank: a bank with no physical premises. Deutsche Bank has created, Prudential has and Bank One has

Virtual a reality

Theoretically, anyone with a Flexcube package could set up a virtual bank. In reality there are numerous obstacles ranging from security concerns to consumer habits to doubts as to the potential profits of a virtual bank compared to a traditional bank.

"We typically find technology is neither the inhibitor nor the liberator of such changes," says Lane Lekala, principal analyst at Gartner Group in Hong Kong. "A lot of robust technology is out there that is capable of doing more than it's ever asked to do. The question is how is it deployed and used, and how do you measure its success."

I-flex concedes that it is difficult to quantify cost-savings or measure how long it might take a client to recoup the costs of its investment. Part of the saved costs might come from personnel cuts as manual jobs are automated. Others may result from simplifying paper-hungry billing and settlement services.

"The important thing is that the system gives you a flexibility that allows you to introduce new products to the market faster," says Hukku. "It's based on open architecture which means it can handle 5,000 or 5 million customers; and it's also hardware-independent, multilingual and realtime, which means you never have to close down."

I-flex gets about 50% of its revenue from its packaged software products. The other 50% comes from its consulting business and the creation of tailored software such as a data-warehousing or data mining programmes. Now the company, which has 1,400 employees, is also exploring the applications solutions provider (ASP) market. ASPs buy software from developers and rent it to multiple consumers. It means users don't have to install, upgrade or maintain the software themselves.

"This is an area we're just now exploring," says Hukku. "We've just formed a joint venture with HDFC bank to create our own ASP, where we will offer the same software to many smaller banks."


I-flex faces some big hurdles as it seeks to grow. India's reputation for producing talented software experts is both an asset and a headache. India's software exports to Europe could rise 65% in the year to March 2001 as the continent offers more visas for software professionals, says the National Association of Software and Service Companies. The flight of talent, though, outweighs the benefits of increased exports. The country currently exports $4 billion in software products a year, but it needs 2.2 million software experts to reach its projected export target of $87 billion by 2008, according to consultant McKinsey and Co.

India-based companies, including i-flex, are fighting to retain talented staff by offering innovative share option schemes and higher salaries. i-flex has set aside 12% of the company's 8.3 million issued shares for its managers and employees, but it's an uphill battle.

"The share option scheme helps, but for youngsters it is understandable they should want to go overseas," says Hukku. "There are three members of my staff that could walk out the door and be hired as CEOs tomorrow."

I-flex hasn't said when it plans to apply for its listing. It's still in the process of talking to banks. It is confident though, that it will survive with or without a listing. Since its inception nearly a decade ago, the company has posted compound annual growth of 90%. It sees no reason that should stop.

"We are at the crosspoint where software and financial institutions meet," Hukku says. "We're at the intersection of two of the hottest areas in the world in terms of the investment needed for change. The last problem in the world for us is lack of demand for our products. Our main problem is growing fast enough to meet that demand."

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