Indian IT's big deal
Rahul Sachitanand October 2, 2008
Three years ago, Vineet Nayar laid down a bold three-stage plan to leapfrog his rivals in the IT services market. Last fortnight the CEO at HCL Technologies, India’s fifth-largest IT services firm, took another step in that direction—and in the process took on Bangalore based rival Infosys Technologies, currently #2 in India, by revenues. In August, Infosys had attempted to conclude the biggest overseas acquisition by an Indian IT services company when it made a Rs 3,300-crore bid for UK-based SAP consultancy Axon. Last fortnight, HCL muscled its way into the fray by making a counterbid for Axon that’s 8.3 per cent higher. At the time of writing, analysts were expecting Infosys to revise its bid, and HCL to duly respond with another counter-bid.
With compounded average revenue growth of 35 per cent over the last five years, operating margins of 18 per cent and access to untapped markets such as the public sector, Axon makes for a compelling proposition. “Axon has complementary skillsets to HCL … they are in the front end, blue printing and architecting deals and we’re strong with implementation,” Nayar adds. HCL has already taken some initiatives in the third phase of its plan to become a global IT giant. Its acquisitions have thus far been focussed on the back-end (see Urge to Merge), areas such as BPO and expense management. “Now the company wants to make its first big deal as it seeks to sew together its expertise in back-end processes with the huge opportunity offered in SAP and specifically enterprise consulting,” says a Mumbai-based analyst.
According to industry estimates, the enterprise applications market is expected to grow from $88 billion to $104 billion between 2007 and 2010, while the SAP segment will grow from $24 billion to $35 billion in the same time. “Indian companies can address just $1.5-1.8 billion of the SAP services market,” estimates Ram Krishna, HCL’s Head of Application Services. The stage appears set for an allout bidding battle. “This is not a counter bid, but a proactive one,” claimed Nayar in a conference call with analysts. According to industry watchers, this deal boils down to who blinks first. While HCL has raised £400 million from Standard Chartered Bank for this bid (at an interest rate of approximately 6-6.5 per cent), it will also pump in around £41 million from its own finances. “Infosys has much deeper pockets with around $2 billion in reserves compared to $570 million for HCL,” says an analyst.
The aggressive move for Axon is also important for HCL to get around 2,000 SAP analysts on board and ramp up its business. “We get around 11 per cent of our revenues from enterprise applications, compared to 24-44 per cent for our large rivals. The HCL-Axon combine will take this share up to 30 per cent,” says Nayar. In Infosys’ case the deal is expected to double its 2,000-stong SAP consultant base. Satyam reportedly houses the largest number of SAP consultants among Indian IT services companies, but clinching the Axon deal should give Infosys or HCL a chance to leapfrog their Hyderabad-based rival. “We get a small percentage of revenues from consulting and blueprint, whereas Axon gets 88 per cent of its revenues from this segment,” says HCL’s Krishna.