HCL Tech: On a good wicket

AstraZeneca deal indicates EU could emerge as a large market for Indian tech firms.

Earlier this week, HCL Technologies announced it had been selected by AstraZeneca to manage its data centres across 60 locations, globally. The deal includes hosting services and transformation of existing data centres to state-of-the-art facilities. The deal will span five years, but HCL has not disclosed its size.

Several things make this deal interesting and, as a result, analysts have given a thumbs-up to it. This indicates deal traction in infrastructure management services (IMS) is strong. It also indicates HCL is better placed to get a higher market share in this space, as clients close their budgets. According to Goldman Sachs, stable revenue growth for HCL will be driven by the resilient IMS business. "We forecast 29 per cent CAGR in FY11-FY14E (additional $1 billion over $830 million as of FY11)."

Though the deal size has not been disclosed, analysts say, given it's a multi-centre deal and spread over five years, it would be large. However, the AstraZeneca deal has been preceded by other wins from Eli Lilly in July and Merck ($500 million) last year. Given the latest deal is from Europe, Goldman Sachs says this reaffirms their stance that the EU may be a long-term revenue driver for Indian off-shoring companies, as pressure to cut costs increases.

Pinc Research believes HCL Tech has the capability to win new projects, due to its strength in IMS and package implementation (through AXON), particularly when project restructuring deals are growing faster. The company is focusing on developing capabilities in enterprise mobility and analytics to complement existing offerings. This could improve margins on the back of an improving employee pyramid and scale efficiencies.

However, what will move the stock is out-performance in emerging verticals (energy, utilities and retail) and higher Ebitda margins in the near term, supported by higher off-shoring and utilisation.