Why is HCL India's most valued IT Services company?

Summary:HCL's ability to win large amounts of 'renewal' business and grow new verticals like infrastructure into big revenue drivers has something to do with its success

HCL Tech

 

Most pictures of HCL's boss Anant Gupta in Indian papers and magazines show him with a huge smile on his face. Now, it may be that Gupta is a habitually ebullient fellow unable to prevent himself from cracking wide grins. However, I would bet my bottom Rupee that Gupta’s buoyancy has more to do with how HCL’s stock price has done in just the past two years than any other factor.

In the last two years, HCL’s stock has increased 195 percent versus 78 percent for Indian bluechip giant TCS, 12 percent for the embattled and out-of-favor Infosys and 29 percent for Wipro. However, if you expand the time period to 5 years, the results are even more stark. A massive gulf opens up between HCL and the rest of the pack with an HCL share returning 12.24 times your investment versus 6.28 for TCS, a desultory 1.4 for Infosys and an underwhelming 2.64 for Wipro.

In a recent article in the Economic Times, Gupta expressed great confidence for the quarters and years ahead, saying "We are bullish in the market, we see our funnels are large, pipeline is good." Meanwhile, Infosys was once again criticized by analysts for going back to its old ways of missing or revising forecasts when it suggested that it would end the year with a lower revenue growth than expected while TCS pretty much said the same thing and blamed it on seasonality and domestic volatility.

How has HCL turned in such breathtaking numbers while the rest, with the exception of TCS, continue to stumble and fall.

A large part of the success is thanks to former CEO Vineet Nayar, a larger-than-life leader who realized what HCL should focus on for its growth—namely, the opportunity in renewals that crop up when a 5 to 7 year IT contract expires across US, Europe and Australia. Nayar was the first one to go head-to-head with giants like IBM for expired business and his protégé Anant Gupta, HCL’s current somewhat enigmatic boss, vows to continue the tradition.

It’s a pretty lucrative business. As Gupta says in this piece, the renewals business will be worth around US$40 to US$60 billion over the next three years and its expertise in computer infrastructure and applications 'as a service' will help it win deals.

Anant G HCL
HCL's Anant Gupta

As I had written before in a profile of Gupta, renewals, with its inherent low-cost India advantage, may appear to be an easy opportunity to milk. But Gupta says it is far from being so: "You are challenged by a set of service providers who are running it, you have a finite time in which the transfer has to happen, in some cases you might not have the luxury of knowledge transfer and when the customer does decide, the other provider would have disengaged the people on the project,” said Gupta. "You have to realise these are live projects, so the room for error is negligible."

Gupta, pretty much a lifer at the company, is also one of the big reasons for HCL's success. As I had written before, he has been the chief architect and "the driving force behind the company’s infrastructure division’s transformation into a billion dollar business. In fact, according to analysts, 70 per cent of incremental business for the company comes from here and the group brings in 27 per cent of HCL’s overall revenue pie."

According to ET, the company has inked at least $4 billion in total contract value over the last four quarters and there seems to be a strong linkage between this and the company’s incremental revenue.

Of course sustaining these wins is what will keep HCL at the top and a reliance on just renewals may be a perilous strategy to bank on for the future.

However, for now, with the kind of gaudy numbers that HCL has posted over the years, its peers should feverishly try to clone Gupta for themselves, if they haven't thought of doing so yet.

Topics: Tech Industry, India, Software Development

About

Rajiv is a journalist and filmmaker based out of New Delhi who is interested in how new technologies, innovation, and disruptive business forces are shaking things up in India. He was most recently a features editor at Business Standard newspaper, and started his career as a reporter with Fortune Magazine in New York in the '90s. He a... Full Bio

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