GIANTS RANK 4: HCL Group: The M&A Year

On August 6, 2001, the chairman, presi-dent and CEO of HCL Technologies had

been buoyant–and his statement while announcing the annual results for fiscal

2000-01 was a clear reflection of this.

"This has been an excellent year for us and I am proud of HCL

Technologies’ sterling performance. It endorses our business strategies, our

ability to convert opportunities using the caliber of our people into business

success. By focusing on our core competence in the area of technology

development, we have been able to post aggressive growth and strengthen our

customer relationships."

This time around, when Shiv Nadar gets on to the podium to announce the

performance for fiscal 2001-02, the tone of his address may be different, for

HCL Tech has hasn’t managed the growth levels of the Top 20 software

companies, and the group too has stayed below industry average growth.

SNAPSHOTS Shiv Nadar and the others wanted to set up a computer firm, but since they didn’t have enough funds, they started Microcomp, a calculator company Their first product, a calculator–Micro 2200 Their first Unix-based computer was called Busybee It was after a special McKinsey study recommended a focus on the US market that the group set up HCL America

Flashback 1975: Six young men, all working with DCM, explore the possibility

of starting a company of their own–one rooted in values, directed at creating

a market for its products in a segment hitherto unexplored, hardware. They pool

in all their savings for the initial investment–but since the seed capital of

Rs 1.87 lakh isn’t enough to start a computer company, they are forced to

settle for a calculator company instead, giving birth to Microcomp. A year

later, the team acquires an open license to start a computer company from the

Uttar Pradesh government and Hindustan Computers Ltd (HCL) is set up, in August

1976.

From manufacturing calculators, which formed the base for it’s hardware

business, HCL has not only expanded its product portfolio to virtually every

aspect of IT–from training to software services and office automation–it

also shifted gears to become a software and services major. Through the years,

it has also moved up from #7 position on DQ Top 20 Giants ladder in 1997-98 to

#2 in 1998-99 and occupied #1 slot for the last two years, losing it this year

to the Tatas.

The four quarters of FY 2001-02 have taken the gloss away from HCL’s

revenue history sheet. Despite constant adaptation, innovation and renovation to

meet emerging market needs–the business strategy that has dominated and been

at the core of HCL’s business–Shiv Nadar & Co could do little to counter

the impact of the slowdown. The result–a drastic drop in growth rates. While

HCLT, under the direct stewardship of Nadar, grew by 20%, versus 40% the

previous year, the Vineet Nayyar-led HCL Perot Systems (HPS) could managed only

a 2% growth–from Rs 439 crore to Rs 449 crore. As for HCL Infosystems, fiscal

2001-02 was a year of contradiction–it’s revenues fell 9% from Rs 1,346

crore to Rs 1,221 crore, but it brushed past Compaq to regain its #1 slot in

desktops, with 27% growth and an 8.6% marketshare.

Group companies spent the year fighting off the slowdown both in the domestic

and export markets. Despite emerging as the #1 player in the desktop market,

HCLI’s domestic revenues were down 9%, from Rs 1,190 crore last year to Rs

1,079 crore. While the company continued to focus on providing customized

software solutions, application development and maintenance, e-business

solutions and enterprise solutions in the export market, it’s revenue from the

segment slipped by 10%–from Rs 156 crore to Rs 142 crore.

Despite the reversals, however, the group has gone full steam ahead with

acquisitions, consolidation and reorientation, besides focusing on long-term

relationships with clients. HCLT has already taken initiatives to address the

new growth areas–to start with, it has acquired a 51% stake in Deutsche

Software for Rs 120 crore, and this is expected to be a major growth driver in

coming years. Deutsche Software provides software development and maintenance

services for the parent company and is expected to deliver $100 million a year

in business till 2004, at which time HCLT will acquire the remaining 49% in the

joint venture. Further, HCLT is repositioning its portfolio, with technology

development services being the mainstay.

BPO is another area that the group is really going after. While HCLI is

counting on its expertise in the hardware and software segment to play a key

role and make the most of this opportunity, HCLT is relying on HCL eServe–its

100% subsidiary–to provide services in the field of process support, contact

centers and sales and marketing support. The company has also acquired a 90%

stake in British Telecom’s Apollo Contact Center. HCLI, meanwhile, has also

increased focus on the Internet segment through subsidiary HCL Infinet. Besides

providing ISP services in 42 cities, Infinet has linked up 500 towns for IP

telephony services. HCLI has also stepped into the call center consulting area

and plans to provide prospective clients in this segment with hardware, systems

integration, facilities management and training. In HW, the company has

increased capacities from 1.5 lakh to 2.5 lakh PCs annually.

On its part, HPS has joined hands with UK-based wireless telecom solutions

provider Aircom International and set up Aircom HPS Wireless Services, offering

consultancy services and products in wireless planning, designing and

optimization. The new company has not only released its suite of network

planning and optimization tools, it has also tied up with the Abu Dhabi-based

Emirates Data Clearing House–a leading provider of clearing services for

roaming facility of cellular operators–to get a stronger foothold in the

Indian cellular space. Similarly, its tieup with US-based technology consulting

firm Pixel is aimed at bringing in revenues from integration services. On the

overall group front, NIIT’s been left out of revenue calculations, and

therefore, HCL as a group, closed the fiscal with a total kitty of Rs 3,222

crore, and a growth rate of 4%. Add NIIT’s Rs 907 crore and HCL would move to

#2 with Rs 4,129 crore, but still some laps behind the Tatas.

TEAM DQ

Note: HCL would have been in second place in the Giants rankings if NIIT’s

numbers were added to its group revenues.

However, starting this year, and after consultations and deliberations with

the HCL Group and NIIT, Dataquest decided to exclude NIIT revenues from HCL’s

total tally. The reason for this was that the only common thread running across

the various HCL companies and NIIT was HCL Technologies’ chairman and CEO Shiv

Nadar’s holdings in a personal capacity–as a corporate entity, the HCL Group

has no stake in NIIT.