‘There will be a strong bounceback in technology in times to come’: ChrysCapital’s Sanjay Jalona

Sanjay Jalona

As Indian Information Technology (IT) services companies steel themselves for a bumpy year ahead, ChrysCapital’s Sanjay Jalona says growth may not match that seen in the last three years, but opportunities still exist.

“We have been spoiled with very heavy growth during COVID years. Growth might not be as much as CFOs tighten the belt, but I think there is still a lot of pent-up demand and technology needs. Growth will be there, but it might not be as extraordinary as the last two-three years,” Jalona told Moneycontrol in an interview.

Jalona’s comments came soon after he, the Operating Partner for investments in the Business Services sector at ChrysCapital, spearheaded the acquisition of Xoriant, a software engineering and digital IT services provider.

He was formerly the CEO and Managing Director of L&T Infotech, before exiting prior to the company’s merger with Mindtree.

The outlook for the sector has been muted across the industry, with company executives saying they are cautiously optimistic.

Jalona said there was an opportunity “like never before,” especially post-COVID, if companies have invested in the right set of capabilities in software engineering. He contrasted this with deliberations of Boards prior to the pandemic, where cybersecurity may have been the primary issue.

Recession concerns

The IT industry is hurting as the US and European economies battle a looming recession amid interest rate hikes and the war in Ukraine that has disrupted global supply chains.

“A lot of people believe that recession is abound, I believe that recession has been there for a while. But, remember that the tech industry always bounces back much stronger and much quicker. If you look at history books, whether it's dot com or the global financial crisis or even COVID, every time tech industry has bounced back very strongly,” he added

When he joined L & T Infotech in 2015, there was much speculation about the death of Indian IT. Then came COVID and the industry witnessed the “most phenomenal growth,” Jalona said.

“We have a strong belief that in the IT industry -- there will be some impact in the market when the credit crunch happens — but there will be a very sharp bounceback in technology in times to come,” he said. Asked if growth is expected to slow in the coming quarters at Indian IT companies, Jalona said that while that was the feeling in multiple contexts, the best litmus test was talking to customers.

Opportunities

“When you talk to customers, and then the customer say I have so much work remaining to be done. And my organisation can use so much transformation. I think I believe that more than any other analyst,” Jalona said.

Jalona maintained that there was still a lot of pent-up demand, and that opportunities will arise despite budget cuts and other factors.

“People wrote the same thing when the Cloud came in, when digital technologies came in… I think I'm still optimistic about at least 8 to 10 years that there will be enough things there. There's still some opportunity as we keep innovating. I don't see the death of the Indian IT industry and digital technology coming anytime soon,” he said.

Jalona said that the kinds of IT deals vary—digital transformation deals haven’t shut down in full, and for a short while customers will cut down on discretionary spending.

“What gave me the confidence when I spoke to 10 of the largest customers and for a company [Xoriant] of this size, that's a significant chunk of revenue, and they felt that even if consolidation were to happen, that Xoriant can only benefit..I think we should look at things more positively with a growth mindset,” he said.

Girish Gaitonde, Xoriant’s CEO, pointed out that since a lot of the company’s customers are cloud companies such as Cisco, Microsoft and Hitachi, the company stands to benefit in deals that are merely to keep the lights on, even if spending is cut in newer areas. He believes that it will at least maintain its current level of growth, if not grow aggressively.

“I think the world is very large, we have a big opportunity, and the most important thing is the day we stop to innovate as an Indian IT industry, as Xoriant, we will perish. It doesn't matter what the state of the market is. Otherwise, I think there's enough opportunity in the marketplace for us to grow,” he said.

Technical pedigree

Xoriant is the second buyout from ChrysCapital's ninth fund, and the first in the IT space after Jalona joined the private equity firm.

Jalona will now be the Chairman of Xoriant’s Board, and expects to be involved in the company’s operations in the first 3-6 months.

“Post that, the existing team has its job and I'll come back to my Board-level responsibilities, which is quarterly, more so than ever. But initially, whatever needs to be done in the first three, six months, I think I'll be quite involved to help set the ball in motion,” he said.

For him, it was Xoriant’s technical pedigree that drew ChrysCapital to acquire the company.

“Xoriant has a very strong technical pedigree. On top of that, we will make investments in terms of adding more talent, putting in more capabilities, putting a process in place for more rigorous strategy planning, account management, operations, whatever expertise we have built with 30 years of doing nothing else but this work. Whatever we can build on there, we will contribute,” he said.

He said that there existed a distinct shortage of good product software engineering and digital engineering companies in the $500 million to $1 billion bracket, with only a few companies of this size.

“That's where Xoriant fits the bill very well. Strong pedigree, strong product engineering, digital engineering capabilities, and a scaled-up asset — it's around $300 million. You can easily take that, organically grow, put good account management capabilities, and inorganically help them.””

Mothership

“There's a great opportunity that lies ahead of us to bridge that gap of some of these companies that are missing in the marketplace,” he added, explaining why the PE firm chose to acquire Xoriant.

The plan with Xoriant, he says, was to create a “mothership”.

Xoriant’s acquisition was part of the firm’s $1.4 billion fund, and the plan is to create two-three such companies in the $500 million-$1 billion bracket.

Around a third of the fund usually goes into IT services, he said.

“We will do multiple acquisitions under Xoriant, for capability, for revenue, multiple kinds…if it fits in the right capability, and that's seen as a white space, whatever it takes for us to do it and we get a good value for it, we'll definitely do multiple things. I don't have a number for it. But as a large mothership, we will at least do one more, if not two out of Fund Nine,” he said.

For now, the PE firm will make investments in Xoriant, look at spaces and gaps the company has, look at companies it can acquire and so on.

“When I spoke to these top 10 customers — while there will be some hiccups here and there — they felt very strongly that they will continue to spend in the next year as well. These are some points that I thought are important for people not to get swayed by what we hear in the marketplace and how the stock market reacts. But always, the IT industry, if you look at history book for the last 30 years, always bounces back much stronger than before,” he said.

Talent trouble

Attrition levels have significantly begun to decline in Indian IT, but hiring too has slowed. CEO Gaitonde said that because Xoriant works in niche areas, it’s been easier for it to hire and train employees.

“We could have grown much faster if the attrition was not the issue. In spite of that, we have been able to do pretty well. That is because our systems are in place,” he says.

Jalona added that companies have changed their hiring cycles to employ people just in time rather than 1-2 years in advance. While he maintained that companies may not face a situation of not having enough employees when demand bounces back, he said that people will be cautious. It is not a situation of contraction, but of growth.

“I think good companies will look at new strategies, new verticals to go in, new capabilities to be built in. There will be some good acquisition opportunities which will come our way and we will capitalise on all of that,” he said.

From IT CEO to PE firm

Jalona joined ChrysCapital after spending 30 years in various IT Services companies. Prior to his stint as the CEO of L&T Infotech, he spent 15 years at Infosys in various roles.

“I have typically been a guy who is the first one switching on the lights in the office to a guy who goes in and shuts the light off and here, playing the roles that I'm playing with the companies, I got to let the operational team run it. Focus a lot more on finding new platforms. So it's been an exciting journey looking at platforms, and creating a new platform that can be a billion-dollar company. That's where I spend a lot of time so now,” he said.

“I'm at least at peace that we have found a good platform, a good mothership to build on for that platform, and excited about working with Girish and team and bringing all that I've learned in the last many years — but hopefully this time, do it through somebody rather than doing it myself,” he added.

Although he resigned as CEO of L&T Infotech in May 2022, Jalona said that he if was CEO today, the priority would be to grow, create more differentiation, have more conversations to create more lines in Customer Relationship Management (CRM) and do more deals.

“That's the simple priority. Close as many long-term deals as possible ahead of time.”

The big worry

His biggest worry—and one that has remained for the last 35 years—is people, he said. IT Services is a people-intensive business, and whether it’s a good climate or bad climate, there’s no other worry other than losing good people, he says.

“I know we will grow. I know the IT industry will grow, whether it will grow by 10 percent, whether it grows by 20-30 percent, it doesn't really matter. Whatever the hiccup, I want to be in the leaders’ quadrant of growth. That's what has always driven me. That's what I think should drive every leader, I think there is a great opportunity even in this market to grow. What worries me in these times is creating a better pipeline, and have more conversations. I start looking for more lines in the CRM system. That's what bothers me,” he says.