HCL GROUP: HeritEdge Year

The giant was reborn. In its 29th year of existence, the
enterprise-one of India's original garage start-ups-woke up to the fact
that its perceived value of brand has gone down over the years.

The Giant realized that time had come to rid the organization
of its complex structure and also felt the need for more formal, 'visible',
relation between HCL Infosystems (HCLI) and HCL Technologies (HCLT).

In a quick but silent move during FY 2004-05, the leadership
rolled out operation cleanup and aptly called it 'Project Heartbeat'. The
objective was to create a unified HCL brand encompassing its various entities
and businesses and creating awareness, interest, and empathy with HCL's
heritage, DNA, size, and stature at various touch points.

Meanwhile, after clearly defining the roles for HCLI and HCLT
as a domestic hardware, imaging and telecom player and an export-oriented IT
services power house, respectively, during the previous fiscal, Nadar and his
team decided to do some more cleaning up by integrating various HCLT companies
into common entities for similar businesses.

The fiscal saw HCLT almost completing its inorganic growth
plan by increasing its stake to 100% in six JVs-Deutsche Software Ltd, Apollo
Contact Centre, Shipara Technologies, Aalayance Inc, Aquila Technologies Ltd and
HCL Enterprise Solutions (HES)-through its "carve out" strategy of
converting clients' non-core and non-revenue earning processes and departments
into a visible lower cost, resource free revenue linked business propositions
and finally buying it out.

The masterstroke strategy has not only ensured continuation
of the core team in acquired companies and consistent performance, it has also
helped HCLT buy them out at a much lower cost. The result: 37% growth as
compared to 28% last year-up from Rs 2,325 crore to Rs 3,194 crore.

While HCLT's financial performance has been stabilizing
over the past few quarters with the inorganic business aligned, much of the
top-line growth was driven by the BPO business. Its software services and
infrastructure services have witnessed subdued growth. In fact, quarterly
revenue growth has been declining in the dominant software services business
over the past four quarters as against the peer group's performance.

Given the high client dependence of the BPO business, BT
accounting for close to 30% of segmental revenues, and the concentration on
voice-based call center work that has higher price competition and low billing
rates, there are concerns about the medium-term impact on HCLT's overall
topline growth and on its bottom line.

HCLT's core technology R&D business, which accounts for
about 22% of revenues, has shown sluggish growth-a 3.5% CQGR over the past 10
quarters in US dollar terms. However, the leadership evinced confidence that the
IT Services growth would pick up soon, referring to the strong headcount
addition in the JFM quarter.

HCLI, on the other hand, continued to ride high on the
growing domestic IT and telecommunication market. It recorded an impressive
growth in terms of unit shipments during the fiscal maintaining its lead in the
desktop market with shipments of over 4.73 lakh units-cornering 13.7% of the
market.

Interestingly, India's largest PC manufacturer has, over
the years, emerged as more of a telecom distribution company, with its
IT-to-Telecom ratio shifting from 62:38 in FY 2002-03 to close to 32:68 in FY
2004-05. The 92% growth in the office automation and telecommunication (OAT)
business-from Rs 2,468 crore in FY 2003-04 to Rs 4,733 crore during the
current fiscal-has once again been the major revenue driver for the company.
Remove the OAT business, as we have done, and the growth drops to 41%, or Rs
2,203 crore in revenue terms. In fact, but for the segment, HCLI's total
revenues would not have crossed the $1 bn mark.

The core PC business has shown impressive growth as compared
to 10% growth during the previous fiscal. This despite the high manufacturing
costs that has impacted the margins. Despite a fall in excise duty (as
percentage of sales) from 2% in the fourth quarter of FY 2003-04 to 0.5% in the
same quarter of the last fiscal, a jump in the total cost of sales has dented
the company's margins. These costs have increased to 94% of sales as compared
to 86% during the corresponding period. Besides, the company has been facing
pressure on realizations due to stiff competition from unorganized and MNC
players.

That the company has still managed to grow sales at such a
scorching pace is a clear indication of the fact that volume growth has been its
main growth driver. The year also saw HCLI gain ground on its own brand of
notebooks, selling around 9% of its total notebook sale of 22K. The company also
benefited from large orders from some PSU clients, commissioning the country's
largest Internet backbone network for BSNL in the JFM quarter. In April 2005,
HCL initiated the massive 'fearless' campaign that was soon to be splashed
across the country to remind the nation that HCL, which was born out of an
entrepreneurial vision to build technology and IT products and solutions from
the ground up, was a $2 bn, 25,000 employees strong group with operations spread
over 26 locations in 15 countries. While this indicates that "operation
cleanup" has been nearly completed and the "Heart Beat" is back,
the enterprise is looking forward to further consolidation of subsidiaries. Does
that mean no more acquisitions? No, the group, particularly HCLT, would continue
to invest in inorganic growth; it's in their DNA, Shiv Nadar and his men
claim.

Shubhendu Parth