HCL's Chowdhry: Confident indeed

HCL Infosystems, India's second largest pc manufacturer, would seem to be in a spot of bother. The major chunk of its topline-79 per cent-comes not from PCs, but from its telecommunications and office automation business. And the distribution of Nokia mobile phones and accessories accounts for more than 70 per cent of this sub-set. Put differently, more than 50 per cent of its topline is tied to the fortunes of Nokia phones in this country. In absolute terms, the revenues and profits from its telecommunications and office automation business were Rs 6,560 crore and Rs 181 crore, respectively, for the nine months ended March 31, 2006 (HCL Infosystems follows a July-June financial year). The problem is the Finnish handset maker proposes to bring half this distribution into its own fold over four quarters starting July 1. Result: HCL Infosystems is staring at a potential deflation of its top line by Rs 2,500 crore in 2006-07.

Chairman Ajai Chowdhry emphatically denies any such possibility. "There will be no dip in revenues," he says, adding, that at worst, topline will remain static next fiscal. He bases his optimism on the buoyancy in the market for mobile handsets and his company's recent agreement with Apple to distribute iPods in India on a non-exclusive basis.

Investors don't seem to be buying this argument. The company's share crashed 30 per cent from Rs 258 on February 17, 2006 to Rs 180 on February 20, 2006, the next trading day, after Nokia announced its plans. It has since dropped further and closed at Rs 130.35 on June 9. The bellwether bse Sensex moved down 1.71 per cent during this period. But analysts believe Chowdhry's statements. "HCL Infosystems should be able to tide over this problem within the next year-and-a-half," says Rajiv Mehta, a research analyst at India Infoline, a stock broking and research firm.

There is merit in this argument. HCL Infosystems' office automation and telecommuncations business has been growing at 72 per cent per annum. If it can maintain this clip-and given the booming market for mobile phones in India, there is little reason to suspect that it won't-and boost its computer sales, and rake in some incremental revenues from the sale of iPods, it may indeed end 2006-07 with flat revenues, or at worst, only a marginal dip in its topline. Chowdhry, in particular, is very bullish on iPods. "Rising incomes and the easy availability will ensure very aggressive growth of iPod sales in India," he says, even while admitting the grey market and the non-availability of suitable Indian content remain formidable hurdles in his path. Chowdhry is toying with the idea of launching his own online content portal and providing full support and replacement in case of theft, accidental loss or even damage from spillage of water to overcome these.

HCL Infosystems, which launched its own notebooks earlier this year, is also looking forward to good growth in its computer business. Incidentally, its new pc manufacturing facility with a capacity of one million PCs and laptops in Uttaranchal, will become operational later this year. "This business is growing at 20-25 per cent per annum," says Mehta. That should add at least Rs 500 crore to the company's bottom line next year. Then, there's HCL's digital camera and its distributorships for Dish TV, Plasma TVs, etc., all of which are high growth areas that are expected to generate substantial revenues in the months ahead.

But, and there's always a but, can these businesses combined contribute in excess of Rs 2,000 crore over the next year? Chowdhry is keeping his fingers crossed.

Reliance Power Play: Act II
A year after the split, the brothers Ambani are busier than ever.

Mukesh (L) and Anil: Building assets

Shareholders of reliance Industries have little reason to complain. The messy battle for ownership between brothers Mukesh and Anil Ambani, and the consequent carve-out of the empire last June, has made their investor community (23 lakh shareholders for RIL and around the same number for R-ADAG) even richer. Shareholders in Mukesh's flagship have also got stock in Anil's companies that include Reliance Communications, Reliance Natural Resources, Reliance Energy and Reliance Capital.

The brothers, for their part, are immersed in a mega asset-building spree. Mukesh has up his sleeve a large-scale retail roll-out that involves an initial investment of $750 million (Rs 3,375 crore), two grand SEZ (special economic zone) projects in New Mumbai and Haryana encompassing 24,000 hectares of land, and a 29 million tonne export-oriented refinery (cost: Rs 27,000 crore). Anil's group-recently christened R-ADAG-is fast getting there, with a breathless flurry of organic and inorganic growth. It bought out Adlabs, and picked up stakes in companies DTDC, Kinetic Engineering, Yatra Online and Spanco Telesystems. Anil also listed the companies demerged from the parent along the way.

Two Reliances may be better than one after all.

-Krishna Gopalan

Land Scam?
The new SEZ policy leaves itself open to misuse.

This has all the makings of a mega land grab. The Empowered Group of Ministers (EGOM) has ruled that promoters need to use only 35 per cent of each Special Economic Zone (SEZ) for industrial and related purposes (this is termed 'processing area'). The balance 65 per cent can be developed into residential or commercial properties, shopping malls and hospitals. It has also granted the Commerce Ministry discretion to ease this 35 per cent stipulation by another 10 per cent. This means that an SEZ promoter can actually develop 75 per cent of the total SEZ area as a pure play real estate venture. It was to preclude precisely such a possibility and to plug the resulting leakage of revenues-SEZ promoters will receive tax and other incentives worth Rs 93,900 crore over the next four years-that the Finance Ministry had wanted 75 per cent of each SEZ to be set aside for the core purpose for which they are approved (read: the processing area has to be 75 per cent). The EGOM decision, therefore, is also seen as a decisive victory for the builders' lobby which had been pushing for these concessions.

The Commerce Ministry downplays its stand-off with the Finance Ministry. "All differences have been sorted," says Gopal Krishna Pillai, Special Secretary in charge of SEZs in the Commerce Ministry. Commerce Minister Kamal Nath is confident that the SEZs will attract investments of Rs 1,00,000 crore over the next three years. Currently, 15 functioning SEZs (with an average size of 200 acres each) have attracted private investment of about Rs 2,200 crore and provide employment to about 1.1 lakh people.

But critics say SEZs are just a front for a real estate scam made more juicy by enormous tax arbitrage opportunities. "In many states, farmers are being asked to surrender their lands at Rs 300 per square yard," says Rajendra Ravi, Convener of National Alliance of People's Movement, which is fighting for the rights of people displaced by mega-projects without adequate compensation. "Once these lands come to developers, their prices begin to rise exponentially," he adds.

There is merit in this statement. "Promoters will have to develop SEZs within three years from the date of final approval; but we can't take any action if they don't. It's their land, so they're free to do whatever they want with it. But, in such cases, they will not get any tax benefits," says Pillai. And what about the cheap land they receive from various state governments and the tax incentives they avail of during these three years? No answers are forthcoming.

India Inc is aware of this potential for misuse. "While approving SEZ projects, care should be taken to screen out those that only want to avail of tax benefits rather than create quality infrastructure and boost exports," says Amit Mitra, Secretary General, Federation of Indian Chambers of Commerce and Industry (FICCI).

Will that happen? If the immediate past is a pointer to the future, then there's little reason for optimism.

-Amit Mukherjee