Cover Story: Nadar's Endgame [Pg.2]

Arun Duggal, HCL Technologies' newly-appointed CFO (he moved from BankAm in June this year) is the man in charge of acquisitions-and it isn't just the copy of Bruce Wasserstein's The Big Deal displayed prominently on a shelf in his office that makes us say so. Duggal is quick to admit that one reason behind the acquisition was Deutsche Bank's not-insignificant it spend. ''But it also helps HCL Technologies enter the banking vertical; besides the structure of the deal ensures that the bank has an economic and contractual obligation for the success of the transaction.''

The two recent deals-Computech and Deutsche Software- as well as reports that the company is eyeing a staffing services firm in the US are indicative of the size and nature of HCL T's future acquisitions. Duggal is certain that these will be ''filling acquisitions'', those driven by the objective of acquiring specific expertise or domain knowledge like the company's acquisition of a stake in the Bangalore-based avionics-focussed software company Shipara, and that they will ''never be $1 billion transactions.'' Not that money matters . HCL T has cash in excess of Rs 1,300 crore in its balancesheet and its ADR issue, when it happens will bring in more.

It isn't just HCL T that is looking for acquisitions or strategic investment opportunities. So are the two companies currently ahead of it in the race, Wipro and Infosys. Both continue to scout actively for acquisitions. An Infosys spokesperson says the company will look ''at companies that will help us expand our portfolio of services as well as our geographic footprint across the globe''. And Wipro's Paul says the company is "looking to join futures with other companies that are self sustaining".

If HCL Tech has hedged its bets in the it-enabled area with a subsidiary, eServe, then Wipro has done so by acquiring a 17 per cent stake in Spectramind for Rs 48 crore. An industry-watcher says that if the big three are placed in a vertical array in terms of the 'techiness' of the work undertaken by them they would read, from bottom to top, Infosys, HCL Tech, and Wipro.

''The (application) software business is a cash cow, but the technology services business is still a star,'' remarks Nayar taking recourse to the Boston Consulting Group's portfolio theory. For those who never heard the term BCG before, a star is a business with high marketshare operating in a high growth area and a cash cow, one with a high marketshare in a low-growth industry segment. However, the HCL T's star may be in for a rough ride. A report by UBS Warburg says ''HCL T's high 48 per cent exposure to technology development services will keep volume growth more sluggish than the overall sector as we expect continued pressure in the hardware and semiconductor sectors''.

HCL T's results for the first quarter of its financial year-sales of Rs 372.4 crore and profits of 112.2 crore-did bear out what the reports suggested quarter-on-quarter sales grew marginally and q-o-q profits actually dipped 9 per cent. The quarter wasn't that bad for the big two. Infosys' quarter-on-quarter sales grew by 6.14 per cent, net profit by 6.07 per cent; and Wipro's by 10.77 per cent and 11.70 per cent. "While risks persist, particularly due to the dependence on the difficult technology sector, we continue to see a longer term upside to HCL T's shares, " says Anil Tiwari of Goldman Sachs.

Given the company's guidance of sales of Rs 1,750 crore and profits of Rs 600 crore for the entire year, HCL Technologies must grow at a faster clip over the next three quarters. The company claims its higher billing rates and greater proportion of offshore revenues will, among other factors, help it achieve this. ''We've never hired for the bench,'' explains Nadar, and goes on to detail how this makes the company's business model more scalable than the competiton's. ''Coming from a manufacturing background, we're very focussed on (capacity) utilisation''.

That, despite a marketing spend greater than its peers', could explain HCL Technologies' higher net profit margin (NPM) of 34.74 per cent as compared to Infosys' 33.08 per cent and Wipro's 20.94 per cent in 2000-01 (even in the disastrous July-September quarter HCL's NPM of 30 per cent compares favourably with Wipro's 24.87 per cent and Infosys' 31 per cent). Or it could be a function of the organisation's frugality. ''This office,'' says Nadar pointing to a fairly unremarkable but functional facility, ''was redone after 14 years''. The only signs of extravagance are some fairly valuable paintings on the walls, but these are from the CEO's personal collection.

It'll take more than just world class processes, however scalable they may be, or frugality for HCL Technologies to achieve its goals. It'll take time too. The company admits that it could take it five years to build practices in each of the vertical segments in which it desires to offer its services. That won't bother Nadar who spends his spare time nurturing a garden at his residence in Delhi's tony Friends Colony neighbourhood. Maybe a year from now we can ask him the question we've always wanted to: Mr. Nadar, how does your garden grow?

"We're already ahead of the rest"
HCL T thus far, and from now on, in CEO Shiv Nadar's own words

On HCL Technologies' preparation for its entry into software: Other companies were already ahead of us. TCS, (for instance), in the application software area. Wipro and Infosys were reasonably entrenched. We felt we could do something different because of our emphasis on partnerships. The Hewlett-Packard partnership (HCL-HP) taught us a lot. In 1996 we went ahead and entered into an agreement with Perot Systems. In 1997, we formed the HCL Perot joint venture. Our marketing started taking shape...

On HCL T's market entry strategy: In 1998, we needed to create a market entry strategy. Again, the way we worked was reverse flowing what everyone else was doing. They took a job, got an offshore contract, and in addition to that had some onsite component. Then, using the engagement they started working on other onsite requirements of the company. We said, let's do onsite requirements, find what the client wants, do offsite worldwide-we had offsites worldwide-and then work backwards to offshore. What they did was right at their time, but if we had followed it we would have waited forever.

On the next stage of growth for HCL T: Acquisition was the next stage of growth. Through 2000, we didn't acquire a company. The valuations were crazy, and several companies had cultures that didn't mesh with ours. Coming from a manufacturing background we have a very high utilisation culture. We couldn't achieve our acquisition goals in 2000

On the Deutsche Software deal: Deutsche Bank has the second largest balancesheet (among banks) in the world. Huge IT spend, $4 billion I think. They have a very high technology orientation. They were looking for a partner. And we had been looking for a partnership (in the banking space).

The next acquisition target: We have a good number of proposals. Our (acquisition) team will open up partnerships that may translate into an acquisition. A couple of partnerships are at an advanced stage.

HCL T's three-year strategy: We would have started making products for markets. Integrated solutions in banking, healthcare, retail ...It takes five years to build these practices. At least in one, we'll be world leaders. The six practices I talked of (Security, Storage, B2B, B2C, CERP, CRM), we have a presence in all. Where we are in technology services today, we will be in all these practices three years from now. Business Process Outsourcing ...it is still very early.