How HCL Tech is emerging as a transformational services provider

Deleon Narcisse, research analyst at TBR, says recent partnerships and IP investments exemplify HCL Technologies’ approach to emerge as an end-to-end transformational services provider.

During Q1 fiscal 2017 HCL Technologies recorded revenue growth of 10 percent, attributable to recent acquisitions and the company’s profitable ITO contracts.

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Although peers such as Infosys (10.9 percent) experienced faster top-line growth, HCL Technologies outpaced TCS (8.1 percent) and Wipro (5.3 percent) over the same period. Initiatives such as BEYONDigital and Next-Gen ITO provide HCL Technologies end-to-end ecosystems through which it can quickly develop customized transformational services for clients across its vertical segments, leading to revenue expansion in Retail & Consumer Packaged Goods (CPG), Manufacturing and Public Services in Q1 fiscal 2017.

From a profitability perspective, HCL Technologies reported an operating margin of 20.6 percent in Q1 fiscal 2017, an improvement of 50 basis points . We attribute this increase to HCL’s ability to leverage automated frameworks such as its DryICE platform and artificial intelligence technologies internally, offsetting the company’s increasing onboarding of expensive onshore resources. During the remainder of 2016, we expect HCL Technologies to realize mid- to upper-single-digit growth, as declining Engineering and R&D and Application Services contract sizes mitigate revenue generation.

HCL Technologies invests in partnerships to help augment the depth of its IoT Works portfolio with industry-specific offerings

According to TBR’s Commercial IoT Market Forecast, the total Internet of Things (IoT) market size is projected to increase to $700 billion at a CAGR of 20.6 percent from 2016 through 2021. Seeking to capture additional revenue opportunities and counter the scale of multinational IoT services providers such as IBM, HCL Technologies utilizes partners to bolster its IoT Works practice with vertically tailored solutions and services. In June HCL Technologies announced IoT partnerships with automotive solution providers Movimento and Rightware.

By crafting services around the specialist vendors’ smart vehicle offerings, such as Movimento’s OTA platform and Rightware’s Kanzi UI solution, HCL Technologies augments the value proposition of its IoT Works portfolio to automotive clients. As a result, we anticipate HCL Technologies will be able to generate new IoT-related contracts within the automotive industry during 2H16, helping the company accelerate revenue growth for its manufacturing vertical.

With the rapid adoption of digital among enterprises, HCL Technologies seeks to drive an end-to-end services experience for customers through its 21st Century Enterprise approach

As CEO Anant Gupta noted in April, roughly 80 percent of HCL Technologies’s contract wins involve a component of digital, highlighting the growing importance of services providers to feature expertise around disruptive technologies such as automation, and translate IT transformation into line-of-business outcomes.

HCL Technologies’s services strategy evolved over the last year with the launches of business units such as BEYONDigital and IoT Works, which are part of what the company now calls its 21st Century Enterprise approach. HCL Technologies’s approach revolves around providing customers an adaptive and integrated services experience that addresses challenges end to end. By investing in niche IP such as Geometric Limited’s GeometricEdge OEM data collaboration platform, HCL Technologies can enhance the flexibility of its unified ecosystems such as BEYONDigital to address vertical-specific headwinds, improving the company’s value proposition to clients.

However, despite HCL Technologies’s messaging around end-to-end services delivery, gaps in its services portfolio, largely around consulting capabilities, hampers its ability to build mindshare as a trusted adviser beyond technology implementation. This leaves room for outsourcing peers such as Cognizant and systems integrators such as Capgemini to take higher value-engagements away from HCL Technologies. Additionally, we believe HCL Technologies must address challenges around successful execution of transformational contract wins, as evidenced by the U.K.-based Student Loans Company contract review announced in May, before it can build its brand as an end-to-end digital services provider.