Shiv Nadar is back: riding on the back of a high-end technology solutions company-HCL Technologies-and with a clutch of audacious plans, like issuing stock to major customers. This time around, he's playing for keeps.

By Suveen K.Sinha 

Stooping slightly, but dapper as always in his dark suit, Shiv Nadar greets us in a makeshift office in a building that is across the road from where HCL Technology's new building is being constructed in Sector iii of Noida, near Delhi. A trifle embarrassed, he apologises for the smallness of the room, whose real occupant is the company's chief technology officer. As he goes around the table and sinks into the large leather-upholstered chair, you cannot help but think of Professor Binns, the History of Magic teacher at Hogwarts School of Witchcraft and Wizardry (Harry Potter and the Philosopher's Stone), who fell asleep by the staff-room fire, and got up the next morning to resume his duties without realising that he'd left his body behind.

Nadar, though, is very much aware of what he has left in his wake. He has put together a group that has overtaken the clutch of Tata infotech companies to emerge as India's largest infotech group, clocking a turnover of Rs 2,922 crore. Of that, infotech education leader NIIT contributes Rs 1,096 crore, hardware major HCL Infosystems (a.k.a. HCL Insys) Rs 996 crore, and software engineering company HCL Technologies Rs 830 crore. But for the real picture, you've got to take a quick look back at the last 25 years, ever since Nadar, along with five others and the Uttar Pradesh Government, embarked on his entrepreneurial odyssey, setting up Hindustan Computers in Delhi's tony Golf Links. Since then, he has moved at dazzling speed, setting up, winding up, and amalgamating companies, sometimes farming out profitable parts of languishing companies to new ones. Chop and change has been the intense 55-year-old's credo and the total number of companies in his group once bloated to 18. Now, it has come down to just three. Today, Nadar-who has stepped down from the boards of NIIT and HCL Insys-is getting ready for what seems to be his last chapter. You could also call it his millennial gambit to reinvent himself.

And regain the crown of India's infotech czar, which was his in the mid-1990s, won in a battle for supremacy in the hardware market, but lost at the end of the decade as the software boom happened and hardware fortunes slumped. The man who prides himself on his long-term vision was caught with the blinkers on. This time, he's hell-bent on not being caught off-guard again.

Nadar saw the Promised Land of software development late-just three years ago, when he decided to play an active role in HCL Tech (earlier known has HCL Consulting), which had humble beginnings as a 300-man research and development division of HCL Insys. HCL Tech did not go unpunished for the late entry. It watched from the sidelines as Infosys Technologies, which got into software some 15 years earlier, set the cash registers ringing by capitalising on a booming application development and maintenance market, boosted by the millennium bug. Unlike HCL, Wipro, once the number two in hardware behind HCL Insys, was much quicker in re-positioning itself as a full service infotech firm and the rewards poured in. ''We did miss out,'' rues HCL Tech's Executive Vice-President and HCL Comnet's (the fully-owned network integration subsidiary of HCL Tech) President, Vineet Nayar, whose office is truly paperless, with just two errant sheets of paper on his desk.

The late entry also skewed HCL Tech's revenue pattern: it derives 34 per cent of its revenues from technology development, 16 per cent from networking services, 18 per cent from high-end software product engineering for software producing companies, and only 32 per cent from application development. Infosys, in contrast, gets 39.5 per cent of its revenues from application development, 25.6 per cent from maintenance and 28 per cent from the Net.

Treading the tech path

But Nadar's strategy for software is built on leveraging HCL Tech's strengths-technology services. Says Nadar: ''As we had done a range of things like professional services, systems integration, technology services, application, development services, and outsourcing, we picked technology services.'' Not limited by the $1.3 trillion market that is infotech in the classical sense-that is, hardware, software, and application development and services-Nadar wants his company to tap the market for research and development, wireless, semi-conductors, digital signal processing, and embedded solutions that find utility even in automobile engineering. The bottomline: these are areas where the yields (read margins) are much higher than conventional application development.

Of course, it isn't easy. It's an area that requires a far more advanced skill set-higher quality manpower-and more of domain expertise. Secondly, it involves closer interaction with the client, which translates into more on-site work that is more expensive than offshore development in India. The risk, too, is much greater as the time to market is much shorter for Net-related solutions. Agrees Nadar: ''If an application is delayed by three months, nobody dies. But if a product goes out, say a Cisco product, with an error...'' Seconds Information Technology India Ltd CEO Vinay Rai: ''If the product doesn't succeed, all the effort is down to zero.''

True, in the area that Nadar is traversing, rapid technology advancements present the threat of a platform becoming obsolete before you can say ''Shiv''. Plus, it's a tough market to crack. Says Kevin D'Silva, Analyst at SocGen Crosby: ''It's not easy to get high-end work. They also have to spend more to get good clients. Their marketing network is bigger and sales and marketing expenditure is 25 per cent against 11-18 per cent for others.'' A company like Infosys, on the other hand, is better insured. Says Infosys' Managing Director, Nandan M. Nilekani: ''Our business strategy is not to depend on any single stream of revenue. The contribution of different services may change over a period depending on the needs of the clients.''

Why then is HCL following such a chancy route? Simple. It makes more money. Points out Nayar: ''HCL Tech's profit margin in application development is only 40 per cent, against 65 per cent in technology development." But that could be because its technology development assignments may be more of high-end work than applications, which is not what it is known for and where its rivals perhaps have better credentials and client relations. Says Sandeep Dhingra, Analyst, Jardine Fleming: ''At the top end of the spectrum, there are good rates either way.'' In fact, he says, HCL's offshore work (which is more remunerative) hasn't reached optimal levels yet.

The technology development route has other pitfalls. Like the threat from application service providers (ASPS), which leverage the Net as a delivery mechanism to provide applications from an on-line data centre to a community of users (See This Software Is For Hire, BT, August 22, 2000). But HCL has a foot in there too. HCL Comnet is developing asp services. ''The idea is to capture the opportunity and offset the impact on HCL Tech,'' says Nayar, who conceptualised Comnet in 1992, just seven years out of college.

But Nadar's new gambit will meet its acid test not just now but a little later when it comes to getting HCL Tech to sustain its high growth rates. In the 12 months to June this year, the company has raked in $206.83 million-against $166.33 million in the preceding year-and analysts are projecting $280 million in the current year. Nadar says the turnover should grow at least 40 per cent every year. But even die-hard optimists inside the company concede that inadequate availability of manpower and the need to sustain quality puts a limit on the organic growth that can be achieved. This has made the company look beyond organic growth.

Growth by acquisition

HCL Tech has tied up with five technology funds-Diamondhead Ventures, Carlyle Europe, Carlyle Asia, Arena, and Viventures II-which have a total corpus of $1.1 million for funding technology start-ups that can become the Ciscos and Microsofts of the future. Apart from the usual gain as investments appreciate, HCL Tech gets work from these start-ups, and equity options in them. The move is designed to maximise stakeholder value as the start-ups grow into giants. Here's why: every R&D dollar invested by biggies like Cisco, Microsoft, Intel, and IBM results in a $120 increase in their market-cap. But when the same companies outsource this R&D work to HCL, the company gets paid a mere 50 cents out of the dollar. ''In a perfect world, we should be creating this wealth for our shareholders,'' says Nadar. That's possible only if HCL owns equity in these companies. Getting equity in the big guns is possible only at the market price, but when it comes to future giants, the value acquisitions will ensure that a far more substantial share of the $120 dollar comes to HCL Tech. The company has invested $8.8 million in the technology funds and the first acquisition has just been concluded in Harmony Software Inc, a new-wave asp, where HCL technologies has invested $2 million along with Reuters and Chevron.

Stock is not only being acquired, but also issued to generate business. HCL has identified 13 key customers for the issue of options that will be converted into equity in 10 years. The value of options to be issued is linked to the business targets for each year for the next five years. While it's a clever strategy-the 13 customers will bring in business worth $380 million in five years-there are downsides. The equity option will provide a life-long lien on HCL's profits for work done over five years, and could scare away competitors of clients who opt for HCL equity from getting the company to do some work for them.

Sharply focused strategies

Nadar's focus on technology services is a welcome relief from the past, when HCL dabbled in everything-from selling EPABXs to granite. HCL Technologies appears far more focused than its earlier avatar. ''More than one (of HCL's earlier businesses) did not do well,'' concedes Nadar, who never really interfered with the CEOs of each of his businesses, although he bailed out most of the failing companies by either picking up their debt or restructuring them. In 1993-94, HCL Ltd, which later became HCL Office Automation, had a fully-owned subsidiary, HCL America, which was more profitable than its parent. A year later, HCL America was bought up by HCL Consulting, a privately-held company that later became HCL Technologies. HCL Ltd became a junk stock until it was bought back by and amalgamated with HCL Insys. Phew!

But that's history. On top of Nadar's agenda now is a tough task: he'll have to make up for lost time. And show that HCL can pull it off in software engineering. This time, he can't afford to miss the bus. Because it's the last one.

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