The Pakistani tech landscape has always been a laggard no matter how one looks at it. Be it a lack of good internet connections, digitised business process or investments into the sector much is left to be desired. Take the PSX for instance where there are a total of 13 scrips in the clustered technology and communication section with a market capitalisation of Rs87.34 billion, a mere 1.1% of the all-share value.
However when the coronavirus outbreak happened there was a lot of talk about how tech will come to dominate every other sector and to an extent it did of course more so in the west. For example the tech-heavy NASDAQ consistently outpaced S&P 500 and DJIA while individual stock prices of companies like Zoom, Netflix and Tesla skyrocketed.
In Pakistan too there were some signs that the wheels of tech are finally moving. At the bourse level the sector gained traction and beat the KSE-100 with YTD gains of 100.69% versus 4.87%. Playing a major role in driving those gains is Systems Ltd, the biggest constituent in the group, which has risen by a phenomenal 229% in 2020 so far. Its consolidated revenue and profits have soared by a CAGR of more than 30% from 2014.
MG recently interviewed Asif Peer, who began his career with the same organisation and served in its US subsidiary for over a decade before returning to Pakistan to take charge as CEO, to discuss fundamentals, macros and future plans among other things. Below is an edited excerpt.
Which category is the biggest revenue driver?
AP: Managed services and implementation would be the top ones, and then of course consulting comes in the beginning.
You start with consulting, then go for implementation and then comes the managed services…that’s the cycle. The last one is a recurring stream as those services are sticky.
Currently what sectors is Systems heavy on in terms of revenue generation?
AP: We have a reliance on telco, public sector, retail CPG and BFSI (banking, financial services and insurance).
You have a wide-ranging portfolio of products including a human capital management platform, retail analytics. What’s their contribution monetarily?
AP: They are largely global products and we are selling those in Europe, North America but the share in terms of annual recurring revenue is not significant. But it’s what we use to acquire the customer and then we sell everything under the sun.
While the top and bottom lines had been growing consistently, it is only earlier this year that the share price started noticing significant gains. What has changed?
AP: I think because more and more foreign investors are taking interest because they are looking at the growth sectors and understand the market very well. They know the IT companies well because global fund managers have been investing in regional markets and tech, and they are aware of the multiples.
Foreigners are not comparing us internally with the PSX but with the peers in the regional markets, which are trading at 20-40x while ours are around 8-10x, which doesn’t make sense. That awareness has finally kicked in.
How does exchange rate affect your costs, especially with regards to IT related services?
AP: Majority of our cost is the human resource, which is in PKR. So if the rupee depreciates, it benefits us and if it appreciates then good for the country. But now we are at that stage of the company where exchange gain doesn’t really bother us. Say 50 paisa or Re1 on earnings per share is not as material.
It used to be huge when we were making only a little, but now in the broader scheme of things, exchange rate gain or less will not be terrible. And I don’t think it would be fluctuating like crazy the way it has been the last two years. The [dollar gain] or loss should be in the range of Rs5-10.
Unlike India where a lot of local companies have set up operations in the US and even sponsor talent on H1B visas, Pakistan has that ecosystem missing. How crucial is it?
AP: We are doing that, and without it you can’t grow. Very simple! You can’t sit in Pakistan and expect the client to keep giving you the orders from North America. It’s not like a textile business. It’s not a product that you sample, ship accordingly and then they approve it and then repeat.
What will it take to change?
AP: Investments. Any small company with 50-100 people that wants to go to the US and set up operations, sales and pre-sales, legal teams requires a few million dollars to start with.
Globally, there has been a shift towards product-based companies in the tech sector. Why hasn’t that happened in Pakistan?
AP: Product means innovation and then product-based companies need funding, they require VCs and angel investors.
Their multiples are very different…they are trading at like even 5-10x of revenue, not earnings. OneLoad is one of the products we have launched and our goal is similar: how can we grow and take it to the next level?
What progress has been made so far after One Load’s EMI licensing?
AP: We are building more use cases so we can penetrate the market much better.
Currently only 18% of Systems’ topline comes from Pakistan. How do you see this figure changing over the next year?
AP: I think our focus is heavily on exports but of course we will not leave Pakistan. Both should grow in a similar proportion but exports should rise at a higher pace.
Where does Systems Ltd stand among the IT exporters?
AP: We were the largest IT services exporter this year but our numbers are too small. Nothing to be proud of.
Which measures do you think are crucial in boosting those numbers?
AP: I think the State Bank is working to ease out certain things that if you need to take out money from Pakistan, you can. For example, their policies towards remittances, or freelancers opening their accounts, allowing the investment to happen by sending through Pakistan.
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