Dell's direct-sales strategy brings new profits in India

Bangalore: Dell Inc., maligned by analysts in the US for relying too long on selling personal computers over the internet, is making headway with that old strategy in what may prove a more important market: India.

PC purchases are rising more than three times faster in India than the US, and Dell's market share there has more than doubled in the past three years, researcher IDC said. That probably helped drive a 7.9 per cent sales gain at Dell last quarter to $15.9 billion, according to the average estimate in a Bloomberg survey.

Dell is gaining market share because much of the demand in India comes from corporations, which are increasingly bypassing resellers and buying directly over the phone or the internet and from sales staff. Focusing on developing countries may help Round Rock, Texas-based Dell surmount an economic slump in the US, which has pinched technology budgets.

"Dell's direct-sales method gives it the inside track with large, sophisticated enterprises," said Louis Miscioscia, a Boston-based analyst with Cowen & Co. He advises investors to buy the shares and doesn't own any.

Hewlett-Packard Co. also is having a strong run in India, boosting market share to 18.4 per cent in the first quarter from 13.1 per cent in the same period in 2005, according to IDC in Framingham, Massachusetts. Dell's share of Indian PC shipments climbed to 7.6 per cent from 3.1 per cent. Both have won customers from India's HCL Technologies Ltd. and smaller competitors.

Turnaround

Dell, the world's second-largest PC maker, reports earnings after US markets close today. Overseas sales probably surpassed revenue at home for the second straight quarter, said Frost & Sullivan Inc. analyst Daniel Longfield in San Antonio. Dell doesn't break out sales in India, saying only that growth there reached 52 per cent in its first quarter.

Net income in the second quarter ended August 1 may have dropped 3.6 per cent to $719.2 million, or 36 cents a share, crimped by costs to win consumer business by signing up retail partners, according to the Bloomberg survey of 12 analysts.

Dell spokesman David Frink declined to comment before the results come out. Chief Executive Officer Michael Dell, in the second year of a plan to revive flagging sales growth, is trying to catch up to bigger rival Hewlett-Packard, which gets two-thirds of revenue outside the US

He flew to India this month when he wanted to show off the biggest upgrade to Dell's business machines in six years, seeking to tempt customers with models that have longer battery life. Yesterday the company announced plans to sell four new PCs aimed at small and medium-sized businesses in China and 20 other emerging markets.

Hewlett-Packard sells both directly to customers and through resellers in India, company spokeswoman Emma McCulloch said in an interview. Hewlett-Packard doesn't provide a breakdown of sales through the different channels.

Dell shares have climbed 40 per cent since mid-April, compared with a 2.1 per cent increase for Hewlett-Packard, amid optimism that the turn-around is taking hold. Dell advanced 46 cents, or 1.8 per cent, to $25.63 yesterday in Nasdaq Stock Market trading.

"Dell's rise from $20 a share to $25 reflected a realisation that Dell was not such a chump of a company," said Clay Sumner, an analyst with Arlington, Virginia-based Friedman, Billings, Ramsey & Co. He advises shareholders to buy the stock and doesn't own any.

Short sellers

It is becoming tougher for short sellers to cover bets on Dell, a sign the share price may rise further. The short interest ratio, or short interest as a percentage of daily volume, rose to 2.82, the highest in two years, ahead of Dell's report.

Short sellers sell borrowed shares, betting they can buy them back at a lower price. Because the stock is rising, short sellers may need to cover their positions soon.

Dell, 43, abandoned the direct-sales-only strategy to win over more consumer customers, who have fuelled growth in the US Analysts including Benjamin Reitzes, then of UBS AG, criticised him for ignoring consumers when they were spending the most. Dell has added more than 13,000 retail locations since May 2006.

"If you want to be the market leader in any electronic device, you have to move beyond direct only and have multiple sales channels," said Frost's Longfield.

In some emerging markets, where consumers are buying more PCs than they do in India, Dell is pushing retail harder. In China, the company has about 3,500 retail sites, compared with the 40 it will have by the end of the year in India.

While Dell has added retail partners and resellers in India, including Tata Group Inc.'s Croma stores, the company said it has no plans to shift its focus from the direct strategy that serves it so well in India.