Advantage Infosys, HCL as India Inc unlikely to cut spending on IT products

Firms drawing higher revenue from software products and platforms have edge over peers

As Indian IT services players stare at a significant fall in revenue growth in the first two quarters of the current financial year because of the coronavirus disease (Covid-19), companies that draw higher revenues from software products and platforms appear to have an edge over their peers.
 

Industry experts feel that as investments in products and platforms are considered the core of any enterprise, it’s highly unlikely that they will look at effecting a deep cut in these spends.
 

In this respect, HCL Technologies and Infosys among tier-1 firms, and Persistent Systems among mid-tier firms draw more revenue from product and IP-led platform segments. Hence, the severity of the impact on these firms’ top lines is likely to be comparatively lesser. “As the products business belongs to the run side of operations for enterprises, the possibility of furloughs are less.

While spends on the digital side, which are discretionary in nature, have halted in many instances, platforms have not seen much disruption,” said Pareekh Jain, an IT outsourcing advisor and founder of Pareekh Consulting.

“IT firms with sound product portfolio like HCL Technologies and Infosys have more assured revenue flow than others, which puts them in good stead,” he said.
 

Thanks to robust product revenues, many brokerage firms are optimistic about the growth prospects of HCL Technologies in the coming quarters, despite Covid-19. “HCLT is more defensive large-cap story to play amidst the Covid-19 outbreak given higher annuity through IMS (infrastructure management system) and product (revenue),” said ICICI Securities in a note.

“[Research and development] spends are generally more resilient in an uncertain macro relative to IT spends, which again places HCL Technologies in good stead.”
 

Similarly, Axis Securities said in a note that HCL Tech had a strong product business structure with high profit margins, making it resilient.

After acquiring IBM’s IP (intellectual assets) for $1.8 billion last year, the IT firm is likely to add around $700 million of revenue annually, which can act as a cushion. Though HCL Tech’s larger peer, Infosys, doesn’t provide data points on revenue from its product and platform business, sources in the know said it was over $1 billion per annum.
 

Market leader Tata Consultancy Services (TCS) also draws a good amount of revenue from this segment. The company, which reports the revenue from product and platform business under its regional markets and other verticals, witnessed a growth of 7.5 per cent in financial year 2019-20 (FY20).
 

Industry experts also said that given the dip in valuation of SaaS (software as a service) companies globally because of the pandemic, many Indian IT firms are likely to look out for the right opportunities for acquisition in the coming quarters to make revenue streams more assured.