Will The Business Model Work?

Just why does HFCL think it will hit pay dirt? A large part of the answer can be summed up in two words: the Packers. CPH, the holding company of the Packer empire, has interests in media, telecom, e-commerce, and entertainment, with an estimated asset base of $10 billion. In media, it has a controlling interest in Publishing and Broadcast Ltd. (PBL), which owns the popular Channel 9. And PBL in turn has a majority stake in Australia's largest e-commerce company, E.Corp, which has three separate JVs-with Microsoft, e-Bay, and Charles Schwab.

That apart, CPH has stakes in OneTel, a cellular, basic, and internet service provider in Australia, Hong Kong, and parts of Europe that has over a million customers, and a market cap of $3 billion. In addition, CPH owns a string of casinos and theatres. ''The alliance brings in a lot of strategic value to HFCL,'' says Nahata. May be. But does HFCL have what it takes to deliver in the new businesses? Cautions a Mumbai-based analyst: ''It wouldn't be prudent for HFCL to enter into big-time services, since that is not its core competence.''

For instance, the broadband foray in Punjab, which is HFCL's largest investment to date, assumes that the company will be able to rake in Rs 1,500 per subscriber a month. Sure, the payment may be for a bundle of services, but netting customers, especially those who are willing to pay that much, won't be easy. The kind of value-added services that HFCL is talking about-telebanking and teleshopping-will not work unless the local banks and retailers wire up, too. And the mere availability of a backbone will not be incentive enough for businesses to do that.

Already, there is competition in the form of the dot, which is the second licencee in the region. But with the cap on the number of players in a circle gone, the entry of other competitors is imminent. Thus, even by 2003, the Punjab venture could remain a plain old telephony company, instead of becoming the broadband biggie that figures in Nahata's dream.

HFCL's e-commerce plans are even more iffy. Maloo claims Excel Net will focus on b2b, providing not only the physical platform on which business will be transacted, but also services like payment gateways. The finer details of the business are yet to be worked out. Ergo, it's hard to comment on its prospects. What's worrying some analysts, though, is the fact that HFCL has no expertise in managing a services back-end.

Nor does HFCL's outlook in software, if the performance of its existing division is any indicator, look bright. The division, which meets in-house demand for telecom-, embedded-, and application-software, actually reported a decline in sales last year. Points out a KRC Shares and Securities research report: ''At present, the company does not possess the requisite domain knowledge and expertise in (the three) segments.''

Worryingly, HFCL has come a cropper in at least one service business, paging, and its future plans do hinge heavily on services. It has two companies-Microwave Communications and a new acquisition, Pagepoint Services, bought from Motorola for a token Re 1-that are managed by Maloo and Nahata's third partner, Malhotra. On a combined turnover of Rs 62 crore, the companies have racked up losses worth Rs 160 crore. Malhotra-once the technical brain behind HFCL-says revival plans have been worked out, and that they include diversifying into third-party call handling, providing fax services over the internet, and international pre-paid calling.

Meanwhile, HFCL's answer to the problem of expertise is to hire people with the know-how or acquire companies that have the domain knowledge. For example, the software company is headed by Rajiv Shah, who was the Chief Operating Officer of EDS India. And it has set aside Rs 200 crore for acquisitions. Besides, along with Ketan Parekh (Dalal Street's biggest broker) and the Packers, Maloo has set up a KVP Fund (KVP for Ketan, Vinay, and Packer) that will invest its risk capital of $250 million in start-ups. Although Nahata denies it, the market grapevine has it that KVP is eyeing the Mumbai-based animation company, Crest Communications, as its first target.

Of the new ventures, the only one that looks bold and promising at the moment is Nine Broadcasting India, headed by ex-Sony Entertainment brass, Ravina Raj Kohli. NBI already airs a clutch of soaps on Doordarshan's Metro channel, and wants to get into radio, publishing, films, music, and interactive services. But much like the other forays, NBI's plans haven't been fully worked out. Says a Mumbai-based analyst: ''It's hard to say for sure which way things will go.''

Even in its core business of telecom equipment, HFCL faces a grim future. The reason? Tariff protections are rapidly vanishing, and in the years to come the company will find it harder to retain its price edge, or match transnational vendors' state-of-the-art technology. Says the KRC report: ''Unless the company enters the photonics business (equipment for fibre-optic networks), the growth of this (business) is highly doubtful in the long-term.''

Nahata disagrees. According to him, HFCL will be competitive even without the duty protection. His competitors think otherwise. Says Rajan Mehta, 34, Director (Business Development), Nortel Networks: "Indian companies would be competitive in segments vacated by MNC vendors."

Uninspiring Past

Before Nahata and Maloo opened shop with basic telecom equipment, they were into diverse businesses. Nahata was involved in his family's tea trading business, while Maloo-a chartered accountancy drop-out-did marble mining. Getting together at a family wedding, the trio (including Malhotra who isn't related to the other two) decided to venture into a sunrise industry. And telecom, way back in 1987, seemed as good as any other industry.

Their big break came in 1993, when they won a bid for supplying 2 gigahertz (GHZ) microwave radios to the dot. What clinched the deal in their favour was the rock-bottom price they quoted for their equipment: Rs 6.86 lakh against the Rs 25 lakh quoted by transnational vendors.

After that, there was no looking back. Year after year, HFCL steam-rolled competition with hardware that was cheaper by at least 15 per cent. Nahata claims the cost advantage is due to in-house R&D and tariff protection. But HFCL's rivals, who spend a whole lot more on R&D, attribute the company's success to political connections, though nobody would say that for the record. Says Anil Khosla, 49, Director (Marketing & Systems), Alcatel: ''HFCL will go into a tender with a lower price to get huge volumes.'' Adds S. Rajagopalan, 60, former CEO of Mahanagar telephone Nigam limited: ''Just like the Japanese vendors of the 1980s, HFCL was prepared to pay an enormous price to enter the market.''

In fact, by 1996, HFCL had come to be known as a Sukh Ram (the then Union Telecom Minister) company. What seemed to strengthen the suspicion was the ease with which HFCL wriggled out of its basic services blunder. When telephony services were thrown open to private investors, an ambitious HFCL bid a whopping

Rs 85,925 crore for nine circles. Of course, the figure was pulled out of a hat and the company quickly realised its mistake. ("The figure was bid by the consortium in which HFCL was just one of the partners," is Nahata's defence.) Its critics say that HFCL, with the help of Sukh Ram, managed to get the tender conditions changed-the maximum number of A and B category circles that a company could operate in was fixed at three.

HFCL did not sign the licence agreement even for the three circles, and when the dot tried to encash the (bank) guarantee amount, HFCL obtained a stay order. The dot has re-appealed. Says an analyst: ''HFCL is a great survivor.''

Cashing In On The Hype

Actually, it's more than a survivor. In 1989-90, HFCL's sales were less than Rs 1 crore and it made a loss of Rs 4 lakh. In a decade, it has grown its top line more than 500 times. Despite their rustic background, Nahata and Maloo have proved to be savvy operators. They've never lacked friends in high places. Today, their list of well-wishers includes Amar Singh, the Samajwadi Party leader and political wheeler-dealer; Anil Ambani of Reliance Industries; Ketan Parekh, Mumbai's top stockbroker; and cine star Amitabh Bachchan.

By all accounts, it's quite a helpful Friends Inc., be it rumours of the Packers buying Singh expensive gifts, or Ketan Parekh and Maloo bailing out Amitabh Bachchan Corporation Ltd, or Ambani maintaining a distinctly big-brotherly attitude to Nahata and Maloo (he along with politico Amar Singh, and Parekh were very much in evidence at the NBI launch).

The ability to pull the right strings has stood HFCL in good stead. It has never hesitated to tap the markets for money (it has expanded its seed capital of Rs 30 lakh eight times so far). Nor have Nahata and Maloo been reluctant to talk their stock up. Says a Mumbai-based analyst: ''Their strategy is to grab orders at whatever cost, translate that into market news to help the stock price. That's how they've grown.''

That certainly seems true of its recent past. Consider this: on November 7, 1999, when the market got wind of HFCL hiking its stake in Essar Commvision (the Punjab licencee), the scrip rose to Rs 333 from Rs 237 a month earlier. Then, again, the news of it snagging a 10 per cent ownership in the Worldtel-Reliance broadband project in Tamil Nadu more than doubled the price to Rs 677 on December 30, 1999.

More recently, the news of the private placement (the stock flared to Rs 2,123) and the Packer deal (another vault to Rs 2,552 on March 8, 2000) led to inordinate gains in market cap. Says Sanjay Sathpathy, 28, Analyst, First Global: ''The scrip has been volatile because of the kind of news (the company has been) spreading in the market.''

What's also helping HFCL is the fact that Parekh's Triumph International is openly bullish on the stock. The 37-year-old bull admits to being a big investor in the stock, but denies speculating in it. Says he: ''We don't (speculate). We are long-term investors. And we believe they are in the right kind of business at the right time.'' HFCL also indirectly controls the Chennai-based Kothari Pioneer Asset Management Company, which has Rs 2,244 crore in assets and was one of the earliest among the recent operators on the HFCL counter.

Nahata argues that given his scrip's average daily volume of 4.4 million and a price of well over Rs 1,100, it is virtually impossible to manipulate prices. With institutional investors like the UTI, Janus, and Morgan Stanley Dean Witter taking a position on the HFCL counter, it will get harder for any one broker to sway prices. The flip-side: it will also get harder for HFCL to justify its valuation, unless it keeps up the manic pace it promises to.

At one level that will depend on HFCL's ability to retain its cost advantage and simultaneously cope with changing telecom technology in its cash-cow businesses-equipment and turnkey projects. At another level, its success will remain a function of the Packers interest in HFCL, and to a lesser extent, in India. For, the answer to any question about the company's ability to deliver eventually boils down to two words that do make Maloo and Nahata's outrageous dreams seem achievable: the Packers. And the longevity of that relationship could well account for a chunk of Nahata's morning prayers.

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