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With Digital Transformation As Pivot, HCL Technologies Posts Strong Q3 2017 Results

The appointment of C Vijayakumar in the last quarter is proving to be a good move for HCL Technologies. HCL Tech is going through a change and he is bringing in fresh perspectives in the way their deals are being constructed.

There are clear efforts to modernise existing traditional infrastructure contracts (the ones with lower margins) and increase the use of digital technologies. Furthermore, HCL Tech has a significant focus on utilities, healthcare, manufacturing, life sciences among other verticals, that are witnessing a higher need for Digital Transformation and hence higher margins.

Greyhound Standpoint

At present, across all Indian IT Services providers, the digital revenues for IT services broadly range between 10 to 15 percent. Although HCL Tech’s current digital revenues are smallish, compared to other Indian IT Services providers HCL Tech’s thrust on IOT is impressive and significant. Further, at a time when IOT is growing in a big way, having expertise in Embedded Systems is an added strength for HCL Tech.

It’s also encouraging to observe that the company’s focus to grow Business Services is tapering. Business Services as a sector is already plagued by sluggish margins and likely to be most impacted by the protectionist sentiment of the Trump administration. Furthermore, the services offered under this segment are also most likely to be the first victims of automation. On the same note, the company is also showing signs of increasing focus on Europe and away from the US given the current turmoil and uncertainty.

Albeit additional revenue contribution from the company’s acquisitions such as Geometric and other Intellectual Property led partnerships are in the range of 0.6% – 1%, it is a step in the right direction for the HCL Tech’s strategy to increase non-linear growth. The Intellectual Property that HCL got from the Geometric acquisition, coupled with Geometric’s ability to solve critical issues for engineering clients are huge positives. While this area of business is small in terms of revenues, Geometric added solid muscle to the company’s automotive engineering capabilities.

Having said all this, with growing protectionist sentiment globally, Indian IT Services providers including HCL Technologies face a bumpy road ahead.

BPO and call centre jobs requiring relatively lower skills – also the prime candidates for automation by the way of bots – can expect to be affected in square focus. At the same time, better-skilled jobs including coding and maintenance are likely to remain unaffected given their scarce availability and exclusivity. Recent news goes to show that Indian IT Services providers are panicked with the overall protectionist sentiment in the US and are wanting to ensure that possibly nothing acts as an eyesore with the regulators and the newly appointed Trump administration.

In midst of all this, it’s critical to remember that most US-based companies (including many Fortune 500s) are deeply invested (and dependent) on Indian IT Services providers. Neither they nor the Trump administration is in a position to make drastic changes. Albeit Donald Trump can be expected to put the onus on visa restrictions over the coming years, no short-term changes are plausible.

Circling back to HCL Tech’s Q3 2017 Results, while the company has managed to come out in good stead this quarter, sustaining this growth momentum, particularly amidst the realms of uncertainty in key markets like US and UK, will require both back-breaking work and innovative approaches towards IP development, automation and local / remote delivery to ensure non-linear growth.


Analyst:

Anshoo Nandwaani:  Anshoo serves as a VP and Principal Analyst with Greyhound Research, an Award-Winning, Global, Independent Technology Transformation Research & Advisory firm. She also serves as Chief Human Resources Officer (CHRO) of Greyhound Knowledge Group, a Global, Award-Winning, Digital Transformation Research & Advisory Group. To read more about her, click here.


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