Nadar’s HCL Cuts Rates to Tap $15 Billion Deals: Corporate India

By Jonathan Browning and Ketaki Gokhale - Aug 31, 2012

HCL Technologies Ltd. (HCLT), the Indian software developer founded by billionaire Shiv Nadar, plans to cut prices to tap $15 billion of orders as companies switch suppliers of information technology to save cash.

“Today the customer is very angry with the existing vendors and very unhappy with their level of service and support,” HCL’s Chief Executive Officer Vineet Nayar said in an interview in London. The contracts were written before the economic crisis in 2008 “and therefore their terms were one- sided, pro-vendor,” he said.

HCL’s strategy to offer lower rates to lure clients in the U.S. and Europe helped the company post record sales and profit in the year ended June 30. Customers may seek new information technology suppliers for about 30 percent of the $45 billion of orders up for renewal this year, offering business to vendors who are open to changing contract terms, Nayar said.

HCL beat analysts’ estimates by 25 percent in the three months to June 30, exceeding forecasts for the seventh straight quarter. Larger rival Infosys Ltd. (INFO) missed earnings predictions in four of the past eight reporting periods, and on July 12 said sales in the year ending March may rise to at least $7.34 billion, lower than the $7.55 billion forecast in April.

“Clients are becoming more cost conscious,” said Manoj Behera, an analyst at Equirus Securities Pvt. HCL’s global peers are “generally price insensitive. This is something that is driving sales for HCL at this point in time.”

Global spending on information technology may grow at a 3 percent pace in 2012 to $3.6 trillion this year, Gartner said in a July 9 report. That’s slower than 7.9 percent last year as the euro area crisis, a weaker U.S. recovery and a slowdown in China curb economic growth, the researcher said.

‘Crying Wolf’

Nayar said the company, spun off from computer maker HCL in 1997, won customers in 2008 after agreeing to slash its annual charge for a Boston-based client by 62 percent to $25 million after the customer’s revenue dropped to $700 million from $1.8 billion. Nayar didn’t identify the company.

“We saw it as an opportunity of getting into more doors than ever before,” Nayar, 50, said. As customers change vendors, “depending on where you’re sitting, you’re either gaining from it, which is what’s happening with HCL, or you are crying wolf and saying recession.”

The company has signed $2.5 billion of deals in the last six months, he said. HCL has gained 33 percent in the past year compared with a 2.1 percent increase at Infosys. HCL, based in the New Delhi suburb of Noida, fell 0.3 percent to 544.9 rupees at 9:42 a.m. in Mumbai.

Earnings Margin

The company, that sold shares in an initial public offering in 1999, had an earnings margin before interest and taxes of 16.5 percent, lower than the average of 19.5 percent margin among the 10-company BSE IT Index (BSET), according to data compiled by Bloomberg.

The measure for the year ended March 31 was 29 percent at Infosys, the highest among India’s four largest software exporters. Tata Consultancy Services Ltd. (TCS) reported a margin of 28 percent, data show.

“HCL’s volatile margin history makes us wary,” Abhiram Eleswarapu, a Mumbai-based analyst with BNP Paribas Securities India Pvt. said in a July 26 note to clients. “HCL expects to maintain an annual EBIT margin of 16.5 percent at current foreign-exchange rates. However, its margins have historically been volatile, making extrapolations risky.”

Eleswarapu recommends investors reduce their holdings in HCL’s stock and has a hold rating for Infosys.

Cheaper Locations

To maintain margins HCL may propose billing the client on a fixed-price rather than time-and-materials basis or moving work to cheaper locations such as the Philippines from Singapore, as well as automating more processes, Nayar said.

HCL also plans to reevaluate its acquisition strategy to boost growth and be “relevant in 2015,” Nayar said. The company may purchase rivals that will help give it a new technology platform, or expand its geographical presence.

In 2008, HCL outbid Infosys to buy Axon Group Plc, a U.K. business management software provider by agreeing to pay 407 million pounds ($644 million). Nadar, the company’s founder, set up Hindustan Computers Ltd. in 1976 and began selling micro- computers two years later.

“If as an IT services company you’re not going to keep yourself current and you believe that your business model or your technology competence are going to continue to be relevant, then you’re going to become obsolete,” Nayar said. “Your perception of your invincibility is your biggest threat and your biggest competition.”

To contact the reporters on this story: Jonathan Browning in London at jbrowning9@bloomberg.net; Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.