HFCL: IT vision or Pipe-dream?

MAHENDRA
NAHATA, the chairman of Himachal Futuristic Communications Ltd, has always had a
flair for making the headlines. Be it his first order from DoT a decade ago,
HFCL’s outrageous bids of Rs 86,000 crore to snare 13 telecom circles in 1995,
the alleged involvement with the then telecom minister Sukh Ram, or the
fantastic 10% selloff to media tycoon Kerry Packer last year…Nahata and HFCL
have always hogged the limelight.

And HFCL is doing again what it does best–making news. This time, however,
the promoter duo of Nahata-Vinay Maloo is hitting the headlines mostly for the
wrong reasons. The company’s alleged involvement with new Big Bull Ketan
Parekh; reports of insider trading and price rigging; the slithering HFCL scrip
price and market cap; an ambitious entry into the information technology sector
going slow; rumors of Packer pulling out of the deal amid mounting pressure back
home in Australia. Everything is making for bad copy, worse headlines.

Then there are some more still–the now common allegation that political
machinations are behind the north-bound revenues, up from Rs 14 crore in 1993 to
over Rs 500 crore last year; or how share prices were inflated prior to the
Packer deal (wherein Packer’s holding company Consolidated Press Holdings
picked up a 10% stake in HFCL for over Rs 1,000 crore. The market cap then was
Rs 15,000 crore. At today’s market cap of around Rs 1,000 crore, Packer could
have bought out the company with the same investment.

Ask Nahata about the charges and he brushes the allegations aside. "Our
success is purely due to the commitment we have in the business. We had nothing
to do with Ketan Parekh or market rigging. We didn’t pay any money to anybody
for any market manipulation. This negative publicity is an attempt to take away
from us the opportunity to highlight our foray into the information technology
segment," says Nahata.

The IT triangle

What started out in 1987 as a young trio’s–Mahendra Nahata, Vinay Maloo
and Deepak Malhotra–perception of telecom as a sunrise industry has come a
long way. The bet has paid off handsomely as revenues and profits continue to
grow fast. The company has had a compounded annual growth rate of 70%, up from
Rs 14.3 crore in 1993 to Rs 578 crore in 2000. Fourteen years down the line,
Nahata and company has placed its latest bet–convergence.

There was a grand party thrown in Kerry Packer’s honor on March 25 last
year, with the likes of Amitabh Bachchan and Anil Ambani attending. Packer
coughed up Rs 1,000 crore, picked up a 10% stake in the company and Channel 9
came to India.

Subsequently, HFCL has ironed out its IT strategy, involving three companies–Consolidated
Futuristic Solutions, ExcelNet Commerce and HFCL Infotel. According to Nahata,
"They synergize well with our current businesses and we will leverage our
skills for the new segments."

Software: Co-future

Leading the software and services charge is HFCL’s 51% subsidiary
Co-future. Led by ex-EDS man Rajiv Shah, the company plans to focus on three key
areas–software services, IT-enabled services and IT product development.
However, throw out the IT-enabled service component and the model is similar to
that at numerous other software companies. Also as IT-enabled services are
perceived to be at the low end of the value chain, India is yet to see software
companies moving strongly on this.

Nahata denies this. "We are going to leverage existing competencies
available in the group for Co-future. HGCL, with its paging business, has huge
manpower availability that can service IT-enabled projects. We have 80% of the
infrastructure ready." The business model is to provide all possible
services at single point. On the software side, the company is mainly focussing
on telecom software, apart from finance, entertainment and media, healthcare and
e-services. It’s not hard to figure out the choice of domains.

Clearly, in the telecom and entertainment domains, the parents–HFCL and
Packer–have established skill-sets. "These segments comprise the biggest
IT spenders, so one cannot ignore the same," says Co-future chief Shah. As
e-services would be a common factor with another subsidiary Excelnet, there will
be a similar platform there as well.

That leaves healthcare as the odd one out. Before launching Co-future, HFCL
had a small team developing healthcare solutions. Post-formation, it was merged
with the company. In the IT-enabled services segment, Co-future plans to
leverage the relationships it develops, especially in the financial segment, in
order to tap into booming business paths like customer transaction processing.

For the final side of the pyramid, that of IT products, the company has opted
for a safer route by partnering with global players in product development,
preferring to be their implementation partner. Somewhere along the line,
however, HFCL will also leverage its skills to develop its own product line.

"Already, we have about five products in our portfolio, like hospital
management systems, call center and interactive voice response. We feel we have
the right business model in place and are targeting revenues of $80-100 million
within three years," says Shah. Rather ambitious, considering that it took
all of 18 years for Infosys to reach that kind of revenue mark. Can this HFCL
subsidiary shrink that time-frame down to three years especially as the industry
grapples with a slowdown?

Also, the big business expected from the financial segment has already drawn
in the likes of TCS, Infosys, Wipro and Polaris and whether Co-future can
compete with such heavyweights is a big question.

E-services: Excelnet

E-services: Excelnet

The second HFCL baby, Excelnet Commerce, is headed by Lalit Sawhney, earlier
the IT chief at Hindustan Lever. HFCL intends to pump Rs 150 crore into the
venture by means of both debt and equity, and make it a complete e-service
provider. Says Sawhney, "We want to be the end-to-end service provider in
enabling companies onto the web." With Sawhney being a recent inductee,
having joined barely three months back, the final gameplan is still being
formulated and the path the company will take remains unclear. What is clear is
that Excelnet will have tough competition from Wipro, IBM and Sify, particularly
as the business segment is cluttered.

Broadband: HFCL Infotel

Finally, we get to HFCL’s ambitious broadband venture being rolled out in
Punjab. Last year, HFCL picked up an 80% stake in the then basic telephone
operator, Essar Commvision for Rs 130 crore and renamed it HFCL Infotel. The
strategy here is not to stick to providing basic telephony but to lay 2,800 km
of optic fiber (2,000 km already laid out) and roll out a complete communication
service offering.

Apart from basic telephony, the Rs 1,100-crore project hopes to provide data
services like Internet, video-on-demand (retail customers) and VPN (corporate
customers). The projections–by the end of the third year, the company hopes to
have a subscriber base in excess of 300,000. Vijay Kaul, chief marketing
officer, HFCL Infotel, says, "We are hopeful of attaining this objective
and expect monthly revenues of Rs 1,400 per subscriber", which translates
to Rs 500 crore by the end of the third year.

However, a reminder: MTNL, the monopoly telecom provider in India’s two hot
markets, Mumbai and Delhi, managed to touch Rs 500 crore only in 2000, after
years of functioning, despite being the single player. Can HFCL Infotel shrink
that to three years, especially in the face of looming competition from the
erstwhile DoT in its new avatar–Bharat Sanchar Nigam Ltd? Apart from these
factors, the DoT-imposed ceiling of only two licenses per telecom circle has
been removed and Punjab could see more players. The state has the highest per
capita income in the country and therefore, this makes for a very lucrative
market. Can the company still achieve the revenue target?

The case of Delhi-based Spectranet springs to mind. Having laid its fiber
optic network right across Delhi, Spectranet is yet to witness the projected
multitude of people thronging to its doorstep. How broadband will be received in
India remains to be seen.

Is there a second coming?

All of this leads to the big question–will there be a second coming for
HFCL? A confident Nahata thinks so. "We have done it before. For the first
major DoT order, we not only saved DoT a huge sum of money, but also
revolutionized the telecom manufacturing segment and brought in the trend of
price reduction." The competition, however, insists that is was more
political connections that helped HFCL to grow, but Nahata remains confident and
appears to know what he is talking about.

Nahata further insists his success ingredients will work again.
"Attention to technology either through R&D or international alliances,
focus on quality, tight delivery schedules and established engineering practices
to bring in localization and allow lower pricing have always seen us home."
He cites the example of HFCL’s first major order of Rs 100 crore for 2 GHz
microwave radios. "Others quoted a price of Rs 25 lakh per piece, we had
the gall to bid a ridiculously low Rs 7 lakh per piece and of course, we got the
deal. In that single deal, we established ourselves as quality product suppliers
and saved DoT over Rs 400 crore. We will make that work for us again."

The Packer cracker

Finally, for the shining white knight from down under–Kerry Packer. Not
only has HFCL received a windfall of Rs 1,000 crore from him for a 10% stake in
the company (at today’s market price, Packer can buy out HFCL for that kind of
money!), the company and its subsidiaries intend to leverage this connection to
gain a foothold in global markets. With its interest now ranging from media to
e-commerce and telecom to entertainment, HFCL hopes to grab a large chunk with
its "low-cost, high-quality" development work. The Packer Group has a
huge requirement for animation and digital asset management for its worldwide
media empire. Also its tie-up with pure e-commerce companies like Ebay and
Charles Schwab can give HFCL subsidiaries international exposure fast and easy.

HFCL’s dependence on a single client has paid off handsomely in the past. A
similar ‘initial’ strategy is on with the convergence gameplan. In the IT
arena, however, low pricing doesn’t necessarily translate into assured
success. Also, international players are generally averse to negative sentiment
about their chosen partners. With the Sebi and CBI probes into the KP price
rigging scandal getting deeper and murkier, Packer might be forced to pull out.
As things stand today itself, the Packer Group is reported to be facing massive
resentment back home. Therefore, much hangs in the balance for HFCL–Packer’s
decision to stay or move out might well determine whether HFCL has its second
coming or not.

Rajeev Narayan and Yograj
Varma in New Delhi