HCL Technologies has, in some sense, given back to the market what Infosys Technologies had taken away last Friday — confidence. After Friday’s dismal commentary, HCL Tech has come out with its third quarter numbers, which seem to suggest it’s possible to grow even in a tough environment. However, a closer look shows challenges continue to persist. Analysts like HCL’s broad-based growth.
The company has achieved many milestones this quarter, making analysts sit up and take notice. For starters, its LTM revenues have crossed the $4-billion mark and infrastructure services have achieved an annualised run-rate of $1 billion. Its top five and 10 customers have grown 4.5 per cent and 3.5 per cent, respectively. The total contract value of the new deals signed stands at $1.5 billion, against $1 billion in the second quarter. Over the last six months, it has bagged deals worth $2.5 billion, with total deal renewals of around $12 billion. Analysts believe the deal pipeline has been very good this year as well as the last and this would ensure earnings visibility over the next few quarters. The fact that the company would slow down on new deal signings and focus on execution is also a positive.
If this is the rate at which HCL is capturing new businesses, is all well with the software sector? HCL’s numbers suggest while it has managed to get its go-to-market strategy right, the cautious commentary put out by Infosys is not without reason. They also indicate weakness in the financial services vertical, down three per cent sequentially. In America, it has contracted four per cent, similar to what Infosys reported. What does this mean?
Companies like HCL, which have been focusing on the deal renewal market for a while now, will continue to do well in the coming quarters. Even as developed economies are showing revival and corporate profits are up 20 per cent from the pre-2008 levels, companies are not spending. The capex levels are not the same as before, says Krishnan Chatterjee, global head of marketing at HCL Tech. Customers are looking for vendors which can unlock their capital, he adds.
Given that the market is too large and competition very intense, a differentiated business model is needed to succeed. This trend is visible in the data released by TPI, a leading independent sourcing data and advisory firm. In the first quarter of 2012, the total contract value of large deals (over $25 million) was $18.7 billion, down sharply, sequentially (-35 per cent) as well as annually (-22 per cent). Ashish Chopra of Motilal Oswal Securities says: “But this was on expected lines, more a “hangover” effect of the robust, $25-billion deal signings in the past two quarters.”
Over the next five years, the business opportunity in the information technology (IT) services space would be worth $200 billion, of which application maintenance is $30 billion, infrastructure services is $74 billion and total IT is $100 billion. Companies need a broad-based offering to fight for this pie. From here, it’s going to be a battle of business models.
