4 Technology THE ECONOMIC TIMES | BANGALORE | TUESDAY | 12 APRIL 2011

Big Question: How HCL Wipro & HCL Have

an Edge In Writing
Marries Risk & Growth
It follows a strategy of chasing growth that involves taking over clients’ risks as part of complex deals
Smartphone Apps
count to peers Infosys/TCS does attract Sizing The Mobile Apps Services Mkt
PANKAJ MISHRA Comparison With Peers investors, we do not see that changing
anytime soon. Free cash flow at ~30% For some of the world’s top software services firms, including the Indian ven-
dors, this is the biggest shift since offshore outsourcing gaining momentum
BANGALORE HCL’s EBITDA margin fell 625bp against a 275-630bp expansion of profits is much lower than peers
or years, bigger rivals have for peers since 4Q08. HCL’s margin gap with Infy/TCS has widened Infosys and TCS, who are at ~70-75%,”

F viewed HCL Technologies as an

aggressive bidder ready to take
that extra risk while pursuing large
HCLT

40
INFOSYS TCS
they added.
HCL’s growth in new contract sign-
ings during past two years is attributed
TOTAL MOBILE PROCESS REINVENTION SERVICES
TOTAL MOBILE MANAGED DEVICES SERVICES
$7,600

and complex outsourcing contracts to hiring of experienced sales staff

TOTAL MOBILE APP DEVELOPMENT SERVICES
from customers such as Xerox. And an- 35 apart from poaching laterals from rival
EBITDA MARGIN (%)

alysts have continued to warn against 30 firms. This has put pressure on the
the company’s strategy of chasing 25 company’s wage costs because experi- $3,100
growth by risking profitability. 20
enced staff comes at a premium. $3,900
With Tata Consultancy Services, For instance, over last three years lat-
15
Infosys Technologies and Wipro re- erals have accounted for 78% of gross
porting profit margins topping 25%, a 10 hires at HCL compared with nearly $2,500
comparison with peers does raise ques- 5 26% for Infosys during the same peri- $900 $5,600
tions about HCL’s strategy. On its part, 0 od, according to Pankaj Kapoor and $1,600 $4,100
HCL has maintained that by taking Apoorva Oza of Standard Chartered $200
4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11
$300 $2,700
over customer risks that includes Equity Research. The company’s $100 $200 $ 600
transfer of staff — along with other SG&A costs (selling, general and ad- $ 10 $ 70 $1,600
transitions — the company is able to po- ministrative expenses) also grew at $400
sition itself better. But such total IT out- 8.2% versus 5.8% for Infosys during 2010 2011 2012 2013 2014 2015
sourcing engagements come with ad- last four quarters, Kapoor and Oza
ditional risks of revenues linked with
HCL has won 40 deals ($2bn) over last 4 qtrs added in their April report.
Numbers in millions SOURCE: FORRESTER RESEARCH, INC.

annual or quarterly achievements of
agreed targets, which at times affects
monies owed by customers to HCL.
“HCL has always been most aggres-
sive among all our bidders when it
comes to taking on risks, but they al-
ways want more volume of business for
that extra risk,” said one of the top out-
sourcing customers dealing with mul-
tiple Indian vendors. “You do not want
to put all your eggs in the same basket
We estimate HCL Technologies won 70 $50m-plus deals over In many ways, HCL’s strategy of gain-
1Q07- 2Q11 with a combined total contract value of $4.5 billion ing new business by taking on more
risks and offering competitive pricing
US$ 50M+ DEAL WINS - TCV (US$M) - E (LHS)
US$50M+ DEAL WINS (NOS) - E
will face a litmus test this year, espe-
cially with the customers now ready to
spend more. Moreover, rivals such as
1,000 18 Infosys are also now ready to go that ex-
900 16 tra mile for long term contracts that
800 14 bring assured annual revenues.
700 “This downturn has established the
12
crucial need to have at least a quarter
US$ MN
PANKAJ MISHRA
BANGALORE
Top outsourcing customers are asking vendors
to write applications for iPads and Android-
based devices, creating a $17 billion opportuni-
ty. Wipro Technologies, HCL and mid-sized soft-
ware product firm Persistent Systems have an
edge over rivals in making the best of this op-
portunity, as more outsourcing buyers seek to
to be outsourced to a third-party vendors like
Wipro or HCL, together creating a $17-billion
opportunity every year, says Forrester.
For some of the world’s top software services
firms, including the Indian vendors, this is the
biggest shift since offshore outsourcing started
gaining momentum years ago. Infosys for in-
stance, has recently built iPad applications for
Mercedes-Benz Financial Services, the finan-
cial arm of Daimler Chrysler for helping the

always, so sometimes they prevail, but
we normally tend to go with Infosys and
Cognizant for any application develop-
ment work,” he adds.
Having signed contracts worth nearly
$2 billion during past four quarters, HCL
is not paying too much heed to criti-
600
10
500 or more business coming from assured offer new solutions to their customers increas- automaker connect its dealers.
8 long term deals,” said a senior execu- ingly using more and more mobile devices. “Until few years ago, we were developing mo-
400
300 6 tive at one of the top five Indian tech John C McCarthy, principal analyst at the Cam- bile app stores for our telecom customers. Now,
200 4 firms. “I would expect even an Infosys bridge, Massachusetts-based Forrester some of the top US banks are asking us to do
100 2 to be a little more liberal in terms of Research, says these three firms have the re- the same for them,” said a senior executive at
0
sacrificing profits to increase the share quired product development mindset for writ- one of the top three Indian technology firms.
0
of such business,” he added. ing these mobile applications, and for change,
2Q11
1Q08

3Q09
2Q09

4Q09

1Q10
2Q10
4Q07

3Q10
4Q10

1Q11
1Q07

1Q09
2Q08
3Q08

4Q08
2Q07

3Q07

cisms. For brokerage analysts advising
investors, HCL must grow revenues and
improve profits at the same time, some-
thing multinational rival Cognizant has
achieved by reinvesting profits in excess
of 20% into the business.
“HCL’s stock performance (and valua-
tion) hinges on its ability to mirror
Cognizant’s success: sector-leading rev-
enue trajectory and stable margins and
not trading one for the other. HCL’s strat-
egy of focusing on market share gain
has yielded good results over the past 18
months as HCL has grown revenues
ahead of peers,” CLSA analysts Nimish
Joshi, Bhavtosh Vajpayee and Arati
Mishra said in their February report.
At 15.8% earnings before interest & tax
margin (a measure of profitability)
HCL counts UK’s biggest drug maker
GlaxoSmithKline and handset maker
Nokia among its top customers. But
TCS and Infosys are twice as better in
terms of profitability.
“HCL’s margins are comparable with
IBM and others, but the company does
not have such revenues. At this size,
anything less than 20% will raise eye-
brows,” says an executive at a rival
Indian firm. Biting that extra risk for
assured business is not something new
for HCL. In 2005, when HCL signed a
contract with Boeing to provide soft-
ware application development work for
Almost a quarter of HCL’s business “the product engineering experience of these
comes from multi-year engagements companies puts them ahead of Infosys,
where profit margins could be lower or Cognizant and others,” he says. These 3 firms have the required
SOURCE: COMPANY DATA, STANDARD CHARTERED RESEARCH ESTIMATES even negative during first few quarters. “To get into this game, you need to have prod- product development mindset for
Since the first quarter of 2007 till sec- uct development mindset, which is a challenge writing these mobile applications.
ond quarter of 2011, HCL has signed for many,” McCarthy says. Top outsourcing Their product engineering experience
the 787 Dreamliner, the revenues were ices is the company’s trajectory of con- contracts worth $4.5 billion. The com- clients such as GE are already creating iPhone,
linked to every aircraft to be sold by the tinued growth during the downturn: pany is hoping that a significant por- iPad and other Android applications for a large puts them ahead of Infy & CTS
aircraft company. When Boeing was HCL has won eigh deals worth more tion of these deals would now play a number of their employees. Wells Fargo is us-
looking for partners, the global aero- than $100 million in its fiscal year 2010 role in improving profit margins. ing mobile applications to demonstrate its JOHN C MCCARTHY
space market was about to rebound and ending June 2010. “Ebitda margin in a typical five year products to customers. Principal Analyst, Forrester Research
Five of these were with companies annuity deal starts low – could even be According to Forrester, more than 350 com-
headquartered in Europe, including a negative during the transition phase panies have built their own branded apps to According to Gartner, consumers down-
HCL has always been most $500 million deal with Merck, and $125- (in case the vendor is taking over the reach prospects and customers, and 52% of the loaded 5 billion apps in 2010 compared to 2.5 bil-
aggressive among all our million deals with both GSK and headcount/costs) – and reach corporate respondents to a recent Forrester mobile strat- lion in 2009. As banks such as JP Morgan,
bidders when it comes to Nokia,” IDC researchers Mette Ahorlu, average (25-28%) over 18 months. Our egy survey stated that one of their top three American Express and Citi prepare to move
taking on risks, but they Juan Sacchi and Brian Troelsen said in analysis assumes 3 quarters of transi- mobile goals was to “increase customer en- away from traditional branch-based banking
a note. tion phase and last 2 quarters of de- gagement.” and woo the millennial customers hooked on
always want more volume of
However, despite all the growth lies clining phase (assuming no renewal) Firms like Halliburton, Nationwide Mutual to their iPads, they are asking vendors includ-
business for that extra risk the question about whether HCL is with the interim 15 quarters of ramp- Insurance and Nike have built applications ing Infosys, TCS and others to make applica-
stretching its balance-sheet for com- up and stable phases,” Kapoor of that reach out to customers and partners. tions more consumer friendly.
plex risky business, a bet that the com- Standard Chartered says. Parallelly, the information technology func- “Buyers are seeing a fundamental shift
SENIOR EXECUTIVE
pany’s vice-chairman Vineet Nayar is With multi-year annuity deals already tion within an organisation is stepping up its among their users. Such applications cannot
One of HCL’s Top Customers
making for transforming HCL. contributing 22% of its current rev- mobile app plans. Forty-one percent of the be built and maintained by them—you’ll need
“The concomitant deterioration in enues, HCL is hoping that the strategy 2,124 North American and European software 2-3 updates every year,” says McCarthy.
not many vendors were ready to take margins and cash-flows has meant that pays off over next few years, but the decision-makers surveyed in October 2010 said Increased demand for mobile-based services
the risk of linking revenues with busi- there isn’t enough in the plate at the company’s biggest challenge would be that increasing the number of mobile applica- could also force traditional software firms look
ness outcome, which in this case was cash profit level for investors. While we to replicate TCS’ success with narrow- tions for employees, customers, and business at acquiring content platforms, according to
sales for the 787 Dreamliner. do not think having a lower margin is ing its profitability gap with Infosys. partners was a high or critical software prior- Forrester. “As the apps become the consump-
Such engagements, according to the necessarily a bad thing, it needs to be ity. Customers like Nike and many others are tion point for more and more micro content
company officials help HCL gain new accompanied by solid revenue growth looking to build new mobile applications that channels like ESPN Boston, we could see a po-
business even during tough times. over an extended period of time (which We would love to hear from you. target young consumers, manage and update tential for software companies buying more
“One of the key proof points for HCL’s Cognizant has demonstrated),” CLSA Please send us your responses at those applications on a regular basis and content assets. Could Larry Ellison’s next big-
approach to selling and delivering serv- analysts said. “While HCL’s 25% PE dis- et.technology@indiatimes.com change their back-end processes to align with time deal be gobbling up Time Warner?”
the changing market. These services will need McCarthy said.

‘Indian Outsourcing Vendors are Not Very Competitive in Brazil’

Brazil — Latin Ameri- ing this demand?
ca’s largest economy Brazil has been an open market for the
— is the latest hunt- last 200 years. Over 90% of the Fortune
ing ground for India’s top tech firms with 500 companies are right now present in
the country’s market for outsourcing and Brazil. IBM has been here for a long time.
software services set to cross $10-billion So, this is a mature market unlike India.
mark this year. The country’s biggest IT Growth in the Brazilian market is com-
vendor, CPM Braxis, was a hot acquisi- ing from the natural growth of the econ-
tion target for many Indian tech firms un- omy and unlike India, the opportunity is
til European outsourcing vendor in servicing the local market. The IT in-
Capgemini picked up 55% stake last year. dustry in Brazil is growing at 12-15%
David Shpilberg, co-founder and vice- per annum.
chairman of CPM Braxis Capgemini, talks Nearly 90% of our business comes from
about the local market and competition the local market. We only started focus-
from Indian service providers. Excerpts ing on offshore recently. We clocked rev-
from an interview with Shruti enues of $650 million last calendar and
Sabharwal: expect to grow 25% this year. Financial
services is our mainstay. Our margins are
Brazil’s domestic IT market is larger than lower than Indian information technolo-
that of both India and China. What’s driv- gy players.
Are Indian firms giving you competition
for business within Brazil?
Competition comes from both Brazilian
firms and transnationals. IBM has the
The Brazil government has
slapped taxes on imports and
this takes away the labour-cost
advantage of top Indian
IT services firms
DAVID SHPILBERG
Vice-Chairman, CPM Braxis
largest share of the domestic IT market
with 9%, followed by Accenture and
HP/EDS. We come in fourth. Indian com-
panies are not very competitive because
they are not able to send any work back
to India. The government has slapped
taxes on imports and this takes away the
labour-cost advantage of Indian firms.
They have to work here like local play-
ers. They can, however, work here as
nearshore centres. Their global cus-
tomers are asking them for this and they
also service their global clients that are
present here.
To what extent have you been able to tap
markets outside of Brazil?
We have started working with clients in
the US and Europe only the past few
years. But if we expect turnover to dou-
ble in the next three years, we expect
this to triple in the same period. We are
in the same time zone as other western
countries so we are able to respond
faster and we can give real time infra-
structure support. This puts us in a better
position for infrastructure management
services. We also have remote infra-
structure management services.
We are also culturally closer to the Amer-
ican market so we don’t need to spend
much time on training our resources and
we are less hierarchical. Even in price we
can compete with Indian players.
Does Brazil have enough talent avail-
able, a key requirenmnet for the
IT industry?
There is no shortage of trained manpow-
er and we get enough qualified work-
force every year. The IT sector in Brazil
absorbs about 1.5 million employees.
Even at CPM Braxis we are planning to
double our workforce to 12,000 employ-
ees in the next 3 years.

Facebook, Baidu to
Set Up China Service
BLOOMBERG
BEIJING
Facebook has signed an agreement with Baidu
Inc. to set up a social-networking website in
China, Sohu.com reported, citing unidentified
employees at the Chinese search-engine compa-
ny. The agreement followed several meetings be-
tween Facebook Chief Executive Officer Mark
Zuckerberg and Baidu CEO Robin Li, the Chinese
website reported on Monday. The China website
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won’t be integrated with Facebook’s interna-
• 2.2 TFT QWERTY keyboard • BlackBerry maps, GPS tional service, and the start date is not confirmed,
• Vibration, MP3 nngtones • Document editor according to the report.
• 2 MP Camera with LED flash (Word, Excel , PowerPoint , PDF) Kaiser Kuo, a spokesman at Beijing-based
• Bluetooth 2.0 with A2DP Baidu, declined to comment on the report when
• SMS . MMS . Email , PM reached by Bloomberg News. Stephen Dolan,
Singapore-based commercial director for Asia at
Accessories: Facebook, also declined to comment.
• Handsfree • Charger Software CD • Data Cable • Battery Facebook, owner of the world’s most popular so-
Bluetooth • Leather Pouch • 1GB Memory Card cial-networking service, has held talks with poten-
tial partners about how to enter the Chinese mar-
ket, a person familiar with the matter said last week.
• 6 Months Warranty by Third Party Vendor The discussions have been exploratory and may not
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result in an agreement, according to the person.
“We are currently studying and learning about
China, as part of evaluating any possible ap-
proaches that could benefit our users, developers
and advertisers,” Palo Alto, California- based
Facebook said in an e-mailed statement at the time.
CHINA MEETINGS
Baidu’s Li met Zuckerberg during the Facebook
executive’s visit to China in
December, Kuo said at the time.
Zuckerberg, who also held meet-
ings with other Chinese compa-
nies including China Mobile and
Sina Corp, said then that he was on
vacation in the Asian nation, the
Facebook, world’s biggest Internet market by
owner of the users. Baidu, owner of China’s
world’s most most-used search engine, plans to
popular develop more social-networking
social- services, Li said on February 1.
networking The commercial value of social
service, has products is “meaningful,” he said.
held talks China bans pornography, gam-
with bling and content critical of the
potential ruling Communist Party, and
partners blocks websites including Face-
book, Twitter and Google’s
YouTube that don’t follow the nation’s self-cen-
sorship rules. Google pulled its search engine out
of China last year after deciding it would stop
censoring its content.