The Hindu Business Line : Co-existence helps us avert price-cutting: HCL Info

MR Ajai Chowdhry, Chairman and CEO, HCL Infosystems spoke to Business Line on the broad scope of the revised joint distributorship five-year agreement with Nokia.

The company has been an exclusive distributor of Nokia for the past ten years.

What is the rationale of your "co-distributorship" agreement with Nokia and its impact?

We have been working at the next growth phase of phone business. The mobile phone penetration is expected to grow to 250 million by end of 2007, because of the major strategies of the operators. When we were reworking our strategy with Nokia, we wanted to take the next five-year phase and in this period what we have to do to grow the market and keep market share.

Therefore, we took a call on what are the options in front of us. HCL invests deeply and widely all over the country. Or they (Nokia) bring in more distributors. Like what they do globally. Whoever has experimented with multiple distributors in India, has seen that there is a lot of price-cutting going on. To avoid that, we decided to co-exist as distributors and over a period of time, we will develop a model by which we will take over a balanced mix all over the country, over 18-24 months.

Moving to this balanced mix would mean a 50 per cent reduction in volumes in 18-24 months. How will that be smoothened out?

That is what we are working on. That is why we say there would be no reduction in revenues or profits. It would be spread over. We will do it in such a way that it smoothens out the curve. That is possible because of the high growth we are seeing. They (Nokia) will work with us in such a way that our shareholders' interests are taken care of.

Will it be right to infer that margins, at 1.4 per cent at the net profit level and profit before interest and tax margins at 2.5-2.7 per cent will be maintained?

That is correct. The objective here is that if you don't have competitive distributors in the market, then you can protect it. If you put in two competing distributors, then margin erosion takes place. Nokia will sell at the same price and terms that we have. It will maintain a very clear balanced mix all over the country.

How do you react to the stock market reaction to this announcement?

The market in the beginning did not understand implications. When we explained to them, they understood. Initially, the reaction was based on our filing to the stock exchange.

Are you banking on the fact that if the mobile subscriber base grows by 4-5 million, you will be able to still clock 2 million?

Once you look at it that way, then the numbers change completely. You have inferred correctly.

Will it squeeze margins in any way?

No, that is the whole point of this co-existence. If they had appointed a second or third distributor, then I will not even be telling you that the margins won't be affected.

Once you enter more and more areas, won't it mean higher investments in terms of building up outlets?

At places where they will take up, we will move out.

It will even out. And ROCE (return on capital employed) will remain as in the past...

That's the whole idea. That's why it would be done in a smooth way. It's been planned that way. We have thought this through thoroughly.

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