HCL Tech: Thriving on deal renewals

Posts robust performance, belying the dismal picture painted by peers

For all those confused by the conflicting commentaries coming from IT services players, the management commentary from HCL Technologies on its June quarter numbers could offer some clarity. The company, which closes its financial year in June, posted a robust performance in Q4, belying the dismal picture painted by some of its peers. Operationally, it delivered all that the Street wanted to hear — revenues are up, as are margins and the deal pipeline looks healthy for now.

This is thanks to HCL’s relentless focus on the deal renewal market. It gathered that customers were unhappy with existing service providers and would, therefore, renew deals with new service providers. Rather than chase new deals, the company has tailored its service offerings to suit the needs of unhappy clients. HCL’s management cited industry data during its results conference which highlights this trend. IT spends on new deals is down while restructured deals are up in the first six months of 2012. There is a clear shift from greenfield IT deals to brownfield deals, where service providers are transforming existing IT platforms to help clients achieve operational targets.

Even in the ‘bread and butter'’side of the business, clients are becoming more demanding. A new breed of service providers is emerging in the ‘run the business’ side of software services. Eventually, the transformational work or ‘change the business’ kind of work will also come to these service providers. Therefore, the deal pipeline model is archaic and may not indicate much since new deals are few and far between. The key figure to watch would be the increase in share of top clients to revenues. Unlike its larger peers, HCL Tech has managed to grow the share of its top five clients by 5.5 per cent in Q1 and top 10 clients by 4.5 per cent. A big positive has also been a 360-basis point improvement in operating margin. Analysts were expecting margin expansion of 150 basis points on rupee appreciation but HCL has sprung a big surprise, of which 225 basis points is due to the rupee and the rest due to operational efficiency.

HCL has played its cards right over the past year by getting its foot into the door first and then mining clients for more work. So, sequentially revenues are up three per cent to $1.07 billion in US dollar terms and 4.6 per cent in constant currency. This has come on the back of secular growth across geographies and verticals. Compared to the previous quarter, the US grew 2.7 per cent, Europe and the rest of the world seven per cent each. Growth has sustained across service offerings and verticals. While in service offerings infrastructure management has grown 9.2 per cent, sequentially, the healthcare vertical clocked 23 per cent growth.