Company of the year: The rise and rise of HCL Tech under CEO C Vijayakumar

With a focus on innovation and acquisitions, the $10 billion company has scaled up its presence in the global information technology services space

In the first quarter of FY19 HCL Technologies pulled off a rare feat that the information technology (IT) industry has not seen in the recent past. It disrupted the pecking order, replacing Bengaluru-based Wipro as India’s third-largest IT services player. To believe that this happened merely because the latter was preoccupied with restructuring, would be unfair to HCL Technologies, which has been growing at a blazing speed.

Focussing on innovation and building capabilities, both internally and through acquisitions, has helped HCL Technologies scale up its presence in the global IT services space. The company clocked a compounded annual growth rate (CAGR) of 14 per cent in revenues over the past three years, compared to TCS’s 10 per cent and Infosys’s 9.9 per cent. The other milestone it recently crossed is $10 billion in revenues.

With chief executive officer (CEO) C Vijayakumar at the helm, HCL has posted a consistently high revenue growth. Vijaykumar accelerated the adoption and execution of the differentiated Mode 1-2-3 strategy that was introduced in 2016. While Mode 1 relates to traditional businesses such as application and infrastructure services, Mode 2 refers to new technologies, including digital, and Mode 3 constitutes the products and platforms business.

As the growth of traditional services has slowed, most of HCL's growth in the past few years has come from the Mode 2 and 3 segments. In FY20, revenues from Mode 2 and 3 accounted for 33 per cent of HCL’s total revenues, up from 28.4 per cent in FY19.

It has also benefitted greatly from the demand for digital technologies, as companies look to transform their business models and scale up investments in analytics, cloud computing, internet of things, cybersecurity and other digital projects. 

Unlike its peers, which have shied away from acquisitions, HCL has used mergers and acquisitions (M&A) to bolster its presence in new technologies, products and platforms. In December 2019, the company announced the $1.8 billion acquisition of seven of IBM’s software products, such as Notes & Domino, BgFix, AppScan and Unica, among others. The acquisitions allowed the company to onboard over 2,000 partners and conclude 13,000-plus sales transactions.

Vijayakumar concedes that M&A has provided the company with the boost it needed to reach the next level: “The global enterprise software space is a massive $400 billion market, with very large players already in the theatre. There were two choices in front of us — one was to create our own products, which, by the way, we have already done in the IT infrastructure business in automation and service management; the other was to create a quicker and wider door through inorganic means. Our acquisition of select IBM products falls in this bucket.”

According to a recent Ambit Capital Research study, HCL Technologies has spent around $3.4 billion in IP (intellectual property) acquisitions. Ambit believes that this will allow the tech major to generate $1.2 billion in revenues. HCL had estimated the addressable market for acquired IBM products at over $50 billion.

With a focus on building IP assets, driving innovation and filling product gaps via acquisitions, the company spent $879 million in FY20. These include acquisitions of such IBM products as Strong-Bridge Envision and Sankalp Semicon.

Though the segment contributes under 12 per cent of revenues, it is expected to be a growth driver. While investments over the past few years have held back free cash-flow generation, this metric is expected to see a major improvement. The company has also been increasing its research and development spends. Last year it spent nearly Rs 400 crore to create organic growth drivers and next-generation technologies.

Though the Mode 1 business still accounts for the bulk of HCL’s revenues, it is the Mode 2 and 3 businesses that are responsible for most of the company’s growth. Thus, while its constant-currency revenue growth for the past three years has been 12 per cent, Mode 2 and 3 businesses have clocked a CAGR of 35 per cent. Near-term growth is also expected to come from these, even as traditional services are expected to grow in the low single digits.

HCL’s high growth rate comes from managing resources efficiently. The company’s employee productivity is also the highest in the industry. Revenue per employee has risen from $59,685 three years ago to $67,844.

That’s not all. The company’s operating profit margins have been steady at 22-23 per cent, aided by its onshore-offshore mix, higher digital share, automation and higher utilisation. With digital demand increasing manifold owing to the pandemic, the company should be able to sustain its double-digit growth momentum.

CEO Vijayakumar, who is a man in a hurry, wants HCL Technologies to grab a growing share of the IT market. At the recently-concluded Nasscom Technology and Leadership Forum, he said the Indian IT industry has the potential to double in size over the next four to five years by capturing about 20 per cent of the projected US trillion-dollar incremental spending on technology.

“I think, as an industry, we should get at least a 20 per cent share of that, which means $200 billion in revenues over the next five years,” he said.