Stock’s rerating will hinge on HCL’s success in making growth broad-based, in place of present concentration towards IMS
HCLT’s bets on growth were visibly clear at its analysts’ day.
The company’s leadership in IMS and ERD space is undisputed. We found the automation strategy pragmatic with sensible leverage of partner ecosystem where better capability is available and in-house development in case of gaps in the market.
HCLT is attempting to be a disruptive player in applications though it does have well-entrenched competitors to deal with.
The stock has underperformed and will surely become interesting at a lower price; current price does not leave much upside.
COO addressed broader concerns on cloud disruption and detailed growth strategy
The impact of public cloud on the IMS business is a common concern. COO of HCLT, C Vijaya Kumar, highlighted that impact on IMS of public cloud migration will be modest at best.
This view is based on negligible exposure to disrupted parts of IMS i.e. assets and hosting in data centre. HCLT derives 40% of IMS revenues from data centre ops, most of which is focused on G-2000 clients.
It believes that public cloud adoption will be 20-30% by them in which data centre ops revenues will be 50% lower.
In effect only 6% of IMS revenues are at risk which can be offset by surround services such as security, service integration, etc.
HCLT’s growth strategy hinges on three modes—using agile, lean and service-oriented delivery model for existing services offerings laced with DryICE autonomics, experience centric and outcome oriented approach to next gen services, and opportunistic goals in product, IPs and platforms .
Undisputed leadership in IMS and ERD
IMS will power growth led by breadth of capabilities, portfolio of IPs, and solid partnership ecosystem.
The management highlighted a combination of rebids ($22.5 bun annually) and first time outsourcers driving growth. Cross-selling to existing ERD and IMS clients can be a large opportunity, per management.
HCLT is the largest player in ERD (and among the top 5 globally) with focus on a few vertical segments. It is well positioned to capture opportunities in the changing business and technology landscape.
Large deals will be critical to growth: HCLT is pursuing legacy product carve outs, vendor consolidation under risk reward, managed services, partnership of mature products and rebadging of workforce. Near term growth rate will be modest from this service offering.
Look for a better price point
HCLT stock rerating will hinge on its success in broad-basing of growth from current concentration towards IMS.
The company’s bet on being a disruptive player in applications has merits but faces competition from well entrenched players; we do not expect any near term acceleration in growth. Concentration carries higher risks and consequently requires higher margin of safety from an investment standpoint.
The stock has underperformed and will surely become interesting at a lower price. REDUCE stays with unchanged estimates and target price.