A transformed HCL hits the sweet spot

Written by Darlington Jose Hector | Updated: Oct 22 2012, 08:59am hrs
HCLs margin performance has emerged as one of the key features of this IT earnings season thus far. The way in which the company has been able to put together better-than-expected margins despite strong headwinds has placed the IT firm above its rivals. In the July-September quarter the firm registered an EBIT margin of a little over 19%, sustaining the momentum. Though headwinds in the form of forex volatility and wage hikes had a marginal impact, its utilisation levels took good care of the overall margin play. A clutch of analysts were expecting to see wage hikes spoiling the party for HCL but that did not quite happen. The HCL management can take a whole lot of credit for achieving this.

Its last quarter performance is in line with what the market has now come to anticipate from HCL. The IT major has been surprising industry watchers for nearly a year with its consistent performances. What is exciting is the fact that the company has been able to do very well in its American and European markets. When most of the IT firms are trying to focus on emerging markets and developing their product platforms, HCL has concentrated on what gets the maximum value i.e. focus on softwares two key markets. With many contracts up for renewal shortly, HCL has camped around these parts trying to hit the sweet spot. On a LTM basis Europe grew 17% and Americas rose 18%. Sequentially, the firm recorded a rise of 2.7% in Europe and 4% in Americas.

A report from Prabhudas Lilladher has said that the company has reaped the benefits of margin tailwinds due to projects transitioning offshore in the first quarter. The management remains confident of using levers like pyramid rationalisation, facility consolidation and utilisation improvement to help retain the margin, the report stated. The companys 4.5% sequential volume growth, sustained operating margins and 12 large deals wins were key positives, noted a Motilal Oswal report. Revenue growth in constant currency was 2.9% QoQ and dollar revenue at $1,114 million grew 3.2%, only marginally below its estimate of $1,119 million. Growth drivers for the quarter included IMS (+10.3% QoQ), healthcare (14.9%), retail (10.9% QoQ), media (7.4% QoQ) and BFSI (4.1% QoQ). Stated a Barclays report, The results are another step in cementing HCL Techs position within the larger IT services peers group due to consistent growth and improving profitability.

Surely, this would be a proud moment for CEO Vineet Nayar. The company founded by Shiv Nadar has been an early leader in the IT race. But somewhere along the line, probably during the early part of this century, HCL started to stagnate a bit. When one has established an early lead, such a scenario can very well happen. It may not be anything to do with lethargy, but hunger can diminish. It is difficult to spot small weaknesses in large organisations, especially when they are doing well. Nayar realised that he needed to build trust all over again. He turned to what he called the value zone, where value-creators held fort. He realised the value creators in the company reported to powers that did not aid productivity in some cases. Nayar recreated the structure. He made managers accountable to those who create value, despite their seniority. He called it inverting the organisational pyramid. Nayar also started to increase organisational transparency. When employees started to get information, especially those of the financial kind more freely, they felt empowered. This enabled them to start their work quickly without having to spend enormous amount of time mining data. This where his concept of employees first and customers second stemmed from.

He also spotted new trends in the industry faster than some others did, as explained in his book Employees First, Customers Second. He realised that the position of the chief information officer had much more authority in the new global IT order, when compared to the past. It hit him that the industry was valued the most when it developed innovative technologies that made business processes faster. Thirdly, he found that customers were increasingly looking for solutions customised to their specific needs. He also realised that system integrators were coming under pressure from their customers to work to a much higher standard of performance than before. In these trends he found a mountain of opportunities. Transformation has been the buzz word at HCL for over 5 years now, and Nayar has been at the forefront of achieving it. It is no longer groping in the dark.