Hitachi’s New Catch

The recent acquisition of Micro Clinic gives Hitachi Systems a strategic toehold in India’s growing IT services market

By Pankaj Maru

The year 2014 has kicked off with some positive action in the Indian IT space. If some of the deals are anything to go by, Indian IT firms are hot property for global giants.

While Facebook acquired a Bangalore-based software startup, Little Eye Labs, it was followed up by another, bigger deal between Hitachi Systems Limited (a wholly owned subsidiary of the Japanese giant Hitachi Ltd) and Delhi-based IT services firm, Micro Clinic Private Limited.

Though the Facebook–Little Eye Labs deal grabbed much of the attention, from India’s domestic IT market perspective, the Hitachi Systems–Micro Clinic deal is far more significant.

Hitachi Systems is heavily banking on this Indian buyout to make its entry into the Indian domestic IT services market—which is growing much faster than several advanced economies globally.

Decoding the deal
As per the deal, Hitachi Systems Limited has acquired approximately 76% of Micro Clinic shares and is renaming the entity as Hitachi Systems Micro Clinic Private Limited.

For Hitachi Systems, the deal is extremely strategic and is its second Indian buyout: last October, it acquired major stake in Chennai-based Prizm Payment Services, which provides payment services using ATMs and POS systems to banks and financial institutions across India.

Certainly, these two deals in different service areas does give some insight into how Hitachi Systems is slowly building up its portfolio of services to foray into the Indian domestic IT services market.

“Hitachi sees India as an important region in its global strategy. As a member of Hitachi Group, Hitachi Systems Limited will try to build and enhance IT service operations in India, where it expects significant economic growth,” says Yoshinori Okami, Executive Officer, Hitachi Systems.

However, Okami doesn’t see acquisitions as the only way to enter the Indian market but points to the M&A route as a way to reduce risk in new business areas.

“Certainly, acquisitions are not the only way to make our presence felt in the Indian market. However, it is very efficient because this acquisition is able to reduce the risk to get into the new business development area,” observes Okami.

Market observers and analysts agree to Okami’s view on the foray. According to Kavita Bhadauria, Research Manager – Software & IT Services, IDC India, if a large company has to grow organically in the domestic market, it would take a longer time; but inorganically, via acquisitions like that of Micro Clinic, the company can tap huge opportunities in the tier II and III cities in a shorter time.

“So going for acquisition makes more sense for a company like Hitachi Systems,” she says.
 
Riding high on Micro Clinic
Micro Clinic offers a strong platform for Hitachi to tap the domestic market. Started in 1993, the company has 15 offices in main cities, over 150 satellite branches across India and a staff strength of 650. “By fusing such strengths and Hitachi Systems’ continuous services in Japan, we will try to gain new customers,” says Okami.

Besides, Micro Clinic’s strong financial background fits easily with Okami’s view of lowering risk in new business areas. The company has a capital base of Rs 1.25 crore; in fiscal 2013, it recorded net sales of Rs 76.9 crore. On the business side, Micro Clinic enjoys long-standing relationships with other IT vendors, the government sector as well as private organisations.

 According to Tarun Seth, Managing Director, Micro Clinic, his company is in the market for the last 21 years and has always been profitable; this year it has grown by 100%.

“Micro Clinic has strengths in procurement and maintenance services and Hitachi Systems has strengths in system design, implementation and maintenance services. By utilising the two entities’ strengths, the new company will be able to provide comprehensive one-stop IT services,” explains Okami.

While Hitachi Systems is banking high on the buyout, it is also important to know what value it brings to Micro Clinic. “Micro Clinic expects sales enhancement by utilising the Hitachi brand and IT services that Hitachi Systems offers, such as virtualisation and managed services,” says Seth.

“With Hitachi coming in, we feel it will put an accelerator to the growth and it is the best choice for Micro Clinic,” he says.

According to Bhadauria of IDC India, the deal is a win-win situation for both companies. She says that today margins on hardware equipment are declining and so companies like Hitachi Systems
or hardware vendors are shifting focus to IT services and solutions.

At large, it is the channel partners and system integrators that drive business for hardware vendors, but with the falling margins on hardware, they need to look at other areas like enhancing
capabilities and offerings to sustain their business and growth.

For established cash-rich tier I channel partners and large systems integrators like Wipro, TCS HCL, Infosys and others, it is asy to invest in building or adding new capabilities in new emerging technologies by training or hiring human resources.  

But that’s not the case with tier II or tier III channel partners and systems integrators (Micro Clinic is mid-tier player), who may not have the resources or the appetite to invest in new capabilities. And this is where the M&A deals with large organisations become crucial, according to market analysts.

Hitachi’s India business strategy
The Micro Clinic deal emanates from Hitachi’s long term strategy in India. Says Okami, “Hitachi announced India Business Strategy 2015 in December 2012 and Hitachi Systems followed that strategy.” 

Hitachi calls this medium to long term strategy as Hitachi’s Social Innovation Business. Under this strategy, Hitachi is targeting consolidated revenues of 300 billion yen (about Rs 20,000 crore )
in India in fiscal 2016, an approximate three-fold rise from the consolidated revenues in fiscal 2011. However, with the Indian domestic IT market growing 13–16% over the past three years, market analysts are sceptical whether Hitachi will able to achieve its ambitious 2016 target. 

In addition, multinationals like HP, IBM, Dell and others have a strong hold in the Indian market, in hardware as well as services.

Bhadauria of IDC feels that meeting the 300 billion yen target will be a tall order for Hitachi. However, she points out two key areas which can help the company come near: one, continuing on the M&A route; and two, providing IT services for specific segments and large customers.

“Hitachi Systems needs to focus on its strengths in consultancy, design and implementation; and it has to utilise the capabilities of Micro Clinic to build up its service offerings,” opines Bhadauria.

Hitachi executives, not unaware of the immensity of the challenge, are making aggressive plans. Okami says that key measures to push business include, increasing localisation supported by production for consumption in India; strengthening partnerships with Indian firms; and expanding business bases that are strongly linked with the Indian market.

To meet the numbers, Hitachi further plans to expand businesses into Africa and the Middle East by employing India as a base.

Okami adds the business expansion includes promoting research and development activities closely tied to the region, reinforcing a human resource management system and executing the Hitachi Smart Transformation Project, a new cost structure reform project.

To execute the above measures, Okami informs that Hitachi will double the number of employees to 13,000 and will invest 70 billion yen (Rs 4700 crore) between 2012 and 2015 fiscal.

pankaj.maru@expressindia.com