As growth moderates, Fractal banks on AI boom

Revenues weren’t as “explosive” as the company had imagined owing to challenging economic conditions, Velamakanni said. “We had a tough beginning to our last fiscal (FY24) because of the entire macroeconomic slowdown,” Velamakanni told Mint in an interview. 

There was a lot of excitement as well as confusion and friction around AI implementation, he said. “Businesses had to rethink their AI spends as safety, privacy & security concerns took centerstage with the growing power of AI models. Everyone was scrambling to figure out the optimal strategy for their company in this age of AI,” Velamakanni added.

However, the company is positioned for robust growth and much of the AI-driven revenue is yet to come in as companies globally look to further automate their businesses and improve efficiency, Velamakanni said.

“Every major company’s board is paying serious attention to AI, as AI is seen as one of the biggest opportunities as well as a major source of disruption to their current business model,” Velamakanni said. 

In FY23, the company posted a 55.5% jump in consolidated revenues to ₹2,043 crore from a year earlier, as per the company’s latest filings sourced from Tofler.

Fractal Analytics reported a profit of ₹194 crore in FY23 from a loss of ₹148 crore a year earlier. It benefited from an exceptional item gain from the loss of control of a subsidiary company, as per the company’s filings.

Fractal receives about 95% of its revenues from outside India with 70% coming from the US.

Despite receiving a bulk of its revenues from international locations, the company will remain based in India and aims to tap the public markets by the end of this year, people familiar with the matter told Mint. 

While the Mumbai-based company had initially planned to go public in 2021, it decided to defer its plans owing to poor market conditions, one of the people cited above said. 

Last month, Moneycontrol reported on Fractal’s plans to raise over $500 million at a $3-$3.5 billion valuation through an initial public offer and appointed investment banks Kotak Mahindra Bank and Morgan Stanley for the listing.

Though Velamakanni declined to comment on the IPO plans, he said the company has the scale and readiness to go public and it is certainly a part of the long-term strategy.

Fractal Analytics claims to be one of the largest spenders on research and development with about 10-12% of its revenues going into related projects. It joins the growing list of companies like Freshworks, Gupshup and LatentView Analytics that are riding the AI wave currently. 

Founded in 2000 by Velamakanni, Pranay Agrawal, Nirmal Palaparthi, Pradeep Suryanarayan and Ramkrishna Reddy, Fractal Analytics serves across seven industries including consumer packaged goods, retail, financial services and insurance. It offers AI-driven data solutions to about 150 of the Fortune 500 companies, including Google and Wells Fargo.

Fractal’s target group includes companies with either $20 billion in market capitalization or $10 billion in revenues or those with at least 30 million customers, Velamakanni said.

In the early years, Fractal Analytics operated as a pure-play analytics firm that offered data solutions to companies such as ICICI Bank and Hindustan Unilever (HUL). Some of its services included building a statistical scorecard using mathematical models and a process called ‘logistic regression’ for ICICI to help the banking giant identify credible people who are seeking loans. 

Similarly, the company analysed changing consumer behaviour for HUL during the dotcom bubble in 2000 to help the conglomerate understand what it can do to retain customers and make better business decisions with its data.

As time progressed, clients also began to realise the merit of AI and data-driven tools and this led Fractal to acquire companies and build AI businesses internally to support them, the CEO said. Some of its businesses include Asper.ai (AI for revenue growth management), Senseforth.ai (conversational AI for customer service) and Flyfish (generative AI for sales).

Over the last few years, the company got more than $600 million from investors including private equity firm TA Associates and TPG and sovereign wealth fund Khazanah Nasional Berhad through primary and secondary transactions, as per data sourced from Tracxn.

“We had the financial muscle to invest in new businesses and spin off some of these amazing companies such as Qure.ai, Asper.ai & Senseforth.ai only after the Khazanah deal,” Velamakanni said.

In 2016, Khazanah pumped in $100 million at a $300 million valuation. In 2022, the company achieved a unicorn status or a billion-dollar valuation after TPG invested $360 million.

Fractal also incubates businesses and later hives them off as they become successful ventures. So far, it has incubated about half a dozen companies including healthcare startup Qure.ai which raised funds from Sequoia Capital (Peak XV Partners) in 2020.