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Where Does HCL Tech's Confidence To Beat Its Own Revenue Guidance Stem From?

Even in the midst of COVID-19, the company revised its Q2 revenue guidance upwards last week to 3.5 percent from the 1.5-2.5 percent it had forecast during Q1. This came at the back of strong growth momentum it saw across service lines and verticals such as healthcare and telecom.

Sep 22, 2020 / 01:23 PM IST
 
 
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India’s third-largest IT services firm, HCL Tech, shared a mid-quarter update last week that sent its shares surging over 7 percent.

In the update, the company increased its revenue guidance for the second quarter (July-September 2020) to 3.5 percent from the 1.5-2.5 percent it had forecast during Q1, as it saw growth momentum across verticals and service lines.

It was the first of the top Indian IT firms to give such an update.

HCL Tech did not attribute the change in guidance to any particular deal. It said good booking momentum continued this quarter, led by life sciences and healthcare, telecom and media and financial services verticals.

The pipeline continues to look healthy across service lines, verticals and geographies, it said.

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What gives HCL Tech the confidence?

Kalyan Kumar B, Chief Technology Officer, IT Services, HCL Tech, said the answer lies in the company’s diverse business portfolio that focuses on IT services, engineering and products and platforms.

“What is unique is we don’t have a single product or a single service line. We have more diversity and the ability to address a larger addressable market. That is what makes us more confident,” he explained.

HCL Tech is not the only company with a diverse portfolio. Most of the top IT firms, including TCS, Infosys and Wipro, have their own engineering and products and platform play.

For instance, Infosys has Finacle and TCS has Ignio and TCS BaNCS. Wipro has HOLMES.  All these firms have engineering as a portfolio as well.

However, Pareekh Jain, founder, Pareekh Consulting, explained that unlike other IT firms, HCL Tech had a strategic focus on pure play engineering and products and platforms and was aggressive in growing in these areas.

Services mix, multiple long-term contracts

HCL Tech was one of the first top Indian IT firm to cross the $1-billion revenue mark in both engineering and products space, he said. The focus has also helped the IT firm scale up there and win larger deals, he added.

Axis Securities, in a note, said that HCL Tech has a better services mix and multiple long-term contracts across verticals that would aid in better growth in the near term.

This spread is what helped the company gain at the back of COVID-19. For, even as client’s discretionary spend came down in certain areas, it has increased in others.

Close to 70 percent of the company’s revenue came from traditional IT services, followed by engineering and R&D services at 16 percent, and products and platforms at 13.8 percent.

During the quarter, while revenues from IT services and engineering came down due to COVID-19, products and platforms grew 77 percent for the June quarter.

For the quarter ending June 2020, HCL Tech reported revenue of $2.3 billion, down 0.3 percent year-on-year (yoy). TCS’ revenue declined 7.8 percent to $5,059 million $5.05 billion. Infosys' revenue stood at $3,121 million, down 0.3 percent y-o-y whereas Wipro's declined 5.7 percent to $1921 million $1.9 billion.

“So, if you look at it from an overall perspective, COVID-19 has short- term impacts, but I think it is all about how companies respond and realign themselves to find the right opportunity in the mid-term,” he pointed. According to him, HCL Tech is well-positioned to tap into this opportunity.

“We have seen a pretty strong adoption on cloud and digital workplace. Customers are looking at e-commerce and re-architecting some of the core supply chain. From our perspective, we seem to be pretty good,” Kumar said.

Betting on products and platform play

This confidence also comes from the company’s bet on its products and platform play. C Vijayakumar, CEO, HCL Tech, in a recent interview to ET, said that the company expects new generation services and products to account for half of HCL Tech’s revenue in three years.

Pointing out to this, Kumar said: “He (Vijayakumar) has publicly made a statement that future revenue growth will come from products and platform. It is an open book from our perspective.”

This confidence comes from the investments and the work the company has done over the last few years. The company bought IBM’s eight products for $1.8 billion. HCL Software, which refers to the company’s nextgen services portfolio include IBM products and its own products in the area of automation, business data analytics, and security platforms.

The company has also expanded its partnerships with tech players such as Google Cloud to cater to the changing technological needs. HCL Tech and banking software company Temenos signed an exclusive agreement for non-financial services segment for seven years.

The company is also expanding its presence in the telecommunications space, where it sees significant growth opportunity that will boost the company’s product and platform strategy.

In May, the company announced its intent to acquire Cisco’s SON Technology, including products and services, to cater to changing needs in the telecommunications industry as they embrace cloud and transition to 5G.

“The whole telecom market is going through a fundamental shift. They are modernising themselves through virtualisation. So the skill you need are 5G, which is the new skill. That is the big look-forward aspect,” he said.
Swathi Moorthy
first published: Sep 22, 2020 01:23 pm

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