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HCL Tech exceeding market expectations

Jens Butler | Sept. 8, 2009
HCL Tech announced a very positive set of results, including a 17 per cent increase in revenues, for the first time cracking the US$2 billion barrier.

HCL Tech announced a very positive set of results, including a 17 per cent increase in revenues, for the first time cracking the US$2 billion barrier. However, with high levels of debt on short-term finance, a lighter pipeline, a drop off in repeat business and potential ex-Axon employee concerns, it is essential that new client growth on the back of the enhanced onshore presence starts to show results quickly and consistently. Key to this will be the successful transition, alignment, retention and leveraging of the HCL-Axon onshore and offshore capabilities and resources into the existing and new client base.

Positive results, but just driven by Axon numbers?

This set of numbers is the first proper insight we have into the integration programme. We estimate that Axon revenues contributed close to $300 million, given expectations that annually Axon would add $600 million or 30 per cent to HCL revenues. HCL Techs organic revenue growth may still have risen by 2 per cent, positive, given that the HCL reporting cycle includes the recent extremely tough six months; quarter-on-quarter results showed a 7.6 per cent growth to $607 million, outperforming much of the competition.

HCL Tech reported a 6 per cent decline in net income to $264 million whereas the majority of its Indian-based peers have increased this measure through aggressive cost-management programmes. However, given the level of merger integration work being undertaken (Axon, Liberata and Control Point Systems), and in the recent climate, this is still a relatively positive outcome. An improved utilisation figure (offshore up to 76.2 per cent and onshore at 97 per cent) helped to some extent, as did combining the HCL and Axon back-office operations. Achieving a consistent 38 per cent gross margin on the back of the increased onshore resourcing income (up from 49.9 per cent to 58.9 per cent) bodes well for cost management going forward and should ensure some breathing space. But with pipelines not as strong as 12 months ago, a new business development focus leveraging the expensive onshore ex-Axon resources is urgently needed. If utilisation figures do start to drop from their current levels, as has happened elsewhere (in the region of 3 per cent), the HCL lens may start to have a more critical tinge.

Expansion shows nerve, but it will take time to realise substantial new business growth

Part of CEO Vineet Nayyars vision is a more balanced industry portfolio, moving away from the finance-sector-heavy focus of its peers. HCL has a reasonably distributed mix of verticals, with the only underweight areas being the cash-rich government, energy and utilities sectors.

This investment drive has delivered a more balanced set of delivery geographies and a broader portfolio including infrastructure services, enterprise applications solutions and BPO offerings, which is paying dividends given the drop off in the traditional offshoring project-based demand. There is also a reduction in top client dependence (top-five contribution down from 26.7 per cent to 20.6 per cent) and a substantial increase in accounts under $10 million which will demand focus: leverage the top end of town or expand these smaller accounts?


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