 "HCL Tech Q2 numbers indicate traditional outsourcing model is dead")
The business of technology outsourcing is changing rapidly and HCL Tech's September quarter clearly point to the changes that are playing out in the sector. Investors need to start looking at business model and not revenue growth and margin expansion. Outsourcing clients are no longer looking to automate their businesses nor are they looking to cut costs alone. The importance of the traditionally strong time & material business is waning, which means that risks are increasing for players like Infosys and Wipro.
The quarterly numbers of HCL Tech look rather good, with the company signing new deals worth $1 billion even in this quarter. The company has managed to keep its TCV (total contract value) of new deals at this level for the past several quarters. So even as analysts say that the 3.5% sequential growth in dollar revenues is marginally below expectations, HCL's changing business mix, stronger operating metrics, margin expansion (EBIT margins up 300 basis points to 23.8 quarter on quarter) and robust deal pipeline is more relevant.
Going beyond the vanilla numbers, HCL Tech's performance suggests that the traditional model of outsourcing is history. The shift in business is clearly evident as HCL's growth in the September quarter has been led by a robust 8% growth in infrastructure services, while application services (bread and butter business) have grown by 1.1%.
Another interesting development during the quarter has been the change in its business mix, with the share of time and material contracts in overall revenues falling to 46.9% and managed services & fixed price projects accounting for 53.1% of revenues. The company is seeing clients wanting large deals to bundle together both application maintenance and infrastructure management services. This could mean bad news for players which are not in a position to offer such bundled services.
The company has won nine transformational deals during the quarter which are worth over $1 billion. Analysts say HCL Tech has a strong position in one of the fastest growing service vertical of IMS and on the back of this the company has been growing largely at par with its peers. However, Somani expresses her concern over the company's soft growth in the core software services business for four quarters.
The quarterly numbers of HCL Tech look rather good, with the company signing new deals worth $1 billion even in this quarter. The company has managed to keep its TCV (total contract value) of new deals at this level for the past several quarters. So even as analysts say that the 3.5% sequential growth in dollar revenues is marginally below expectations, HCL's changing business mix, stronger operating metrics, margin expansion (EBIT margins up 300 basis points to 23.8 quarter on quarter) and robust deal pipeline is more relevant.
Going beyond the vanilla numbers, HCL Tech's performance suggests that the traditional model of outsourcing is history. The shift in business is clearly evident as HCL's growth in the September quarter has been led by a robust 8% growth in infrastructure services, while application services (bread and butter business) have grown by 1.1%.
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Ankita Somani of Angel Broking says excluding IMS, revenue growth was subdued at 1% sequentially.
Another interesting development during the quarter has been the change in its business mix, with the share of time and material contracts in overall revenues falling to 46.9% and managed services & fixed price projects accounting for 53.1% of revenues. The company is seeing clients wanting large deals to bundle together both application maintenance and infrastructure management services. This could mean bad news for players which are not in a position to offer such bundled services.
The company has won nine transformational deals during the quarter which are worth over $1 billion. Analysts say HCL Tech has a strong position in one of the fastest growing service vertical of IMS and on the back of this the company has been growing largely at par with its peers. However, Somani expresses her concern over the company's soft growth in the core software services business for four quarters.