Sunday, 19 October 2008

Liberata hits HCL's margins

(By Anthony Miller) The smallest of the Indian Top Six SIs, HCL Technologies, got hit by a double-whammy in the July-September quarter (see results here). A $13-14m shortfall from a major banking client left revenues all but flat sequentially. Indeed, if it wasn't for the recent acquisitions of Liberata's financial services (LFS) unit (see HCL buys Liberata's Life & Pensions BPO operations) and US telecom expense management BPO player, Control Point Solutions, HCL's revenues would have shrunk.

But whereas Liberata may have come to HCL's rescue on the top line, it was quite a different matter on profits. HCL management made it all but obvious that LFS had been loss-making and therefore took its toll on HCL's margins. Management seems confident about bringing LFS's margins up to group average (usually around 20% but currently 13-14%), though were not specific about precisely how and when. This seems like a mighty challenge to me. Meanwhile, there was precious little news on the Axon bid other than to confirm HCL is to borrow $800m to put towards the deal at US Libor + 3%. That won't help margins much either. The offer is due to go out to Axon shareholders this week.

What HCL is trying to do with these acquisitions is to accelerate its journey up the IT services and BPO value chain. On the IT services side, HCL has the lowest exposure to Enterprise Application Services (i.e. SAP, Oracle and all that jazz) at just 11% of sales (cf Satyam: 44%; Infosys: 25%). Meanwhile, HCL's BPO business is still heavily call-centre dependent, including as it does BT's Northern Ireland call centres and subsequent similar deals. The LFS and Axon acquisitions are bold moves and I think the outcome is far from certain.

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