About the same time Steve Jobs was shipping his first Apple Macintosh in 1978, a start-up floated by a bunch of young Indian entrepreneurs had developed the first indigenous micro-computer. Hindustan Computers Limited, as it was known then, had developed this machine even before IBM came up with its first version of personal computers or PC. While the three companies were then at the same point in terms of product innovation, 35 years later things have changed dramatically for the Indian company.
Restructuring
HCL Infosystems, as it is called now, has decided to shut down its computer manufacturing business due to declining market share, mounting pressure on profitability and consumers buying more smartphones than PCs. The company has hived off its businesses into three subsidiaries in a bid to unlock value in profitable businesses and isolate loss-making ones.
Under the restructured organisation, products distribution business would be with the parent entity HCL Infosystems. The company is a distributor for PC and mobile phone brands including Dell, Lenovo and Nokia. It gets more than 50 per cent of the overall revenues from this business. System integration and solutions business has been brought under a wholly owned subsidiary HCL Infotech Ltd and IT services, including infrastructure management has been brought under another subsidiary called HCL Services Ltd. In addition, there is HCL Learning Ltd, which is in the education space.
“We started the process (of creating subsidiaries) 18 months ago, it’s now complete,” says Harsh Chitale, the 43 year old CEO of the company. Chitale was roped in from Honeywell Process Solutions in 2010 to replace founder-chairman Ajai Chowdhry with a clear mandate to drive growth for HCL Info. Despite the trailblazing start, HCL Infosystems was always seen, even now, as residing in the shadows of its software sister concern HCL Technologies, created in 1997. In the last five years, while HCL Technologies has grown its profits rapidly, HCL Infosystems has seen a decline in both top line and bottom line. Its revenues have come down from Rs 12,203 crore in 2009 to Rs 8,652 crore in 2013. Compared to a net profit of Rs 260 crore in 2009, HCL Info had losses of Rs 81 crore in 2013.
Chitale wants to change things around and is betting on the new restructured organisation to bring the company back into growth. “In the past, because of it all being part of one company, we could not dissect it and report it. Now, what this structure also allows this additional thing that it allows us to give results separately as audited results of different entities. Now we can separate and say ‘this is good, this is bad and this has really wound up’,” says Chitale.
The game plan is clear. Focus and grow the more profitable distribution and IT services businesses and wind up units which are a drag on the company’s balance sheet. The company is also hoping that separating out the businesses will help it to follow different business models and partnerships. For instance HCL Learning competes with Pearson and EduComp, but there is a large services opportunity for HCL Services for offering IT support to Educomp and Pearson. Under the earlier combined organisation HCL found it difficult to chase such IT deals.
Risks involved
But the risk here is that HCL Infosystems may start competing with HCL Technologies on some of these deals. Chitale, however, says that there are no such concerns. “These are two different listed companies. They have their two different Boards (no common Board Directors). If I see where they operate and where we operate, geographically, 95 per cent of my business is different from their geographies. 95 per cent of my businesses is different even in services from they operate.”
There is a 5 per cent overlap but even there the two companies collaborate in leveraging on each other’s strengths.
Analysts said that things won’t be easy for the company to move into a segment which is already crowded and highly competitive. “Much will depend on how HCL Info can change the mind sets of existing business heads and the broader organization. This is not an easy change to go through and requires deep change management efforts. A key challenge that HCL Info might face in the market is lack of deep C-level relationships beyond the pockets of IT organisation,” says Sanchit Vir Gogia, Group CEO, Greyhound Knowledge Group.
Chitale is betting on creating differentiation to make it big in the services space. “There is nobody who offers infrastructure services including break-fix – end user computing, network management, data centre. What most people do is manage and not break-fix. So, I cover the last mile services of infrastructure service. Then I am also able to offer that last mile of infrastructure service across platforms.”
On the application side, HCL Info is offering solution on new-age technologies and platforms which are still untapped. While incumbent players are big on established platforms such as Java, HCL Info is leap frogging to open sources like MongoDB for data bases, Pentaho for analytics and Liferay for web content management. “I want to be the big daddy of new age technologies. These technologies reduces cost of ownership and offers much higher flexibility,’ says Chitale. The third dimension in the IT service piece for HCL is the office automation services space. For example, the company is getting into document management service, which is estimated to be a Rs 3,000 crore opportunity in India alone.
As for the hardware business, Chitale is content being a distributor for other brands. “We are selling more phones and devices in the country through our distribution business and we are probably making more money in that business than all of these companies. We are definitely going to be a dominant distributor of devices,” he says.
But the decision to exit the manufacturing space has raised many eyebrows especially coming at a time when the Government is in the process of bringing in a slew of policies to make local manufacturing attractive. Chitale dismisses these concerns saying that it’s a well thought out decision. “The key question is, even after those policies, is anything going to change? You have to look at the entire ecosystem in the value chain. We realised two years back that the hardware manufacturing story has definitely struggled and there is no cost and competitive advantage today in manufacturing hardware in our country. Rather, we will do what we are good at.”
Market analysts say that the transformation at HCL had to happen sooner than later . “Service and distribution are likely to be better off alternatives as compared to operate as an original equipment manufacturer from an HCL perspective. By dropping out of the PC business, they will save a lot of pressure on the business,” says Sumanta Mukherjee, General Manager, Research & Consulting, Enterprise IT Infrastructure at CMR India.
Greyhound Knowledge’s Gogia reckons that being a late entrant into the IT services business, HCL Info may have an advantage in terms of learning from established players. “If HCL Info is to play smart, it can take the learnings from other players operations so far, tap the market gaps to add value and use existing relationships to sell. However, this is not an easy change and requires deep-rooted changes to the company's DNA,” says Gogia.