Products and platform business a safe bet for HCL Technologies: Experts

The bet on products and platform business by HCL Technologies has come as a huge positive for the company as the export-driven IT services industry has steered itself through uncertain business environment caused by the pandemic.

According to experts, the guaranteed licence-fee model generated from its products business would help the company achieve the FY21 revenue growth targets comfortably. “The products business is relatively new for Indian IT services players and investors. The vertical is now a significant part of the business for HCL Tech as it is drawing around 14 per cent of revenue,” said Ruchi Burde, assistant vice-president of BOB Capital Markets.

A few Indian mid-tier firms such as Persistent Systems and Majesco are continuously experimenting with products, but HCL Tech is the only top IT services firm to have focused on the products and platforms vertical as a major revenue stream.

“Covid-19 had very limited impact on this segment and, in fact, the current environment has created new demand for licences sales in areas such as e-commerce, digital marketing, and security,” said C Vijayakumar (pictured), chief executive officer, HCL Technologies.

In the June quarter, the company saw the product and platform business growing 77 per cent year on year while it added over 100 clients led by security testing tool App Scan and endpoint management software Big Fix. HCL Tech had purchased seven such products from IBM in July last year for $1.8 billion, marking the largest-ever purchase by an Indian IT firm. The uptick in the company’s revenue on YoY basis was mainly driven by this inorganic growth.

In such environment, the product business is relatively better placed compared to services. It is because annuity-based licences sold to clients provide relatively guaranteed revenue stream for the IT firms, unless clients dramatically chose to change their product choices, which is rare.

“It’s a relatively resilient revenue stream even if one can’t bag new clients in uncertain times like these. So it will add visibility to HCL Tech's near-term revenue,” Burde said.

Also, the normal hurdles of the services business such as pricing discounts, volume contractions, and budget cutdowns do not affect the products business.

Other Indian peers also have indigenously developed products such as Finacle of Infosys and Bancs of Tata Consultancy Services but they form an insignificant part of their business. Products involve long gestation periods and involve huge upfront investments making it an unattractive to focus.

HCL Tech had found merit in doing the product business and cut short the long product cycle of 15-20 years by acquiring already developed commercial products from IBM, Burde said.