HCL may go for buys to pip Infy in 5 yrs

HCL Technologies is learnt to be aiming at overtaking Infosys, the country’s second-largest information technology (IT) services entity, in revenue over the next five years or to at least come close on this measure. Acquisitions and intellectual property (IP) partnerships would drive most of the incremental growth.

HCL’s revenue had surpassed Wipro, the third largest in IT, for the first quarter of this financial year.

According to multiple sources, Noida-headquartered HCL has a turnover target of at least $15 billion (~1,068billion) by2022-23. Thatwould mean a compound annual growth rate (CAGR) of around 14 per cent.

At the end of FY18, the revenue gap between Infosys and HCL was $3.1 billion. In the past five years, HCL revenue grew at a CAGR of 11.5 per cent as compared to Infosys’ 6 per cent. At this rate, the Shiv Nadar-led entity is expected to see a turnover of around $13.5 billion in five years; Infosys' might be $15 billion.

“They have a clear eye on overtaking Infosys in the next five years,” a top industry source said. “The roadmap is that the business should grow 8-10 per cent (annually) organically and 15-20 per cent through the inorganic route, which will enable the company to grow its revenue in mid double-digit.”

A detailed e-mail sent to HCL did not elicit any response.

In the past two financial years, HCL growth was higher than the industry average; its constant currency growth rate was also better than that of Infosys, albeit on a lower base. In FY18, it reported a constant currency revenue growth of 10.5 per cent; Infosys’ was 5.8 per cent. Iin FY17, it was 13.7 per cent, to Infosys’ 8.3 per cent.

“Even if HCL continues to grow at the current rate, they will be quite closer to Infosys organically. So, they are banking on a couple of large acquisitions to maintain a lead,” another industry source said.

According to analysts, HCL’s model of acquisition as a growth strategy had helped it to cross Wipro in revenue terms during this year’s first quarter (Q1), of April to June. Its dollar-term revenue grew 0.8 per cent to $2.054 billion or $28 million higher than Wipro’s $2.026 billion. “HCL has overtaken Wipro on leveraging of acquisitions and IP deals. If they become more aggressive and do a few larger acquisitions, they can come closer in a few years,” said Pareekh Jain, country managing director at HfS Research.

Since April, HCL has spent $359 million on acquiring three companies— H&D International Group, C3i Solutions and Actian Corp. These are expected to fetch it $392.3 million in additional revenue this year.

The company has made $1.1 billion of investment in licensing of IP from global biggies IBM and DXC Technology, among others, in recent times.

“HCLhasstrongdomainexpertise in engineering services, which has a huge growth potential. It can acquire a few mid-tier engineering firms, which will help them to push growth,” a top industry source said, wishing to not be named.

However, some are sceptical about HCL’s ability to close the gap.

"HCL has done a couple of acquisitions and also invested in IP. But, acquisitions come at a cost. Even the revenue accretion from new entities doesn't seem substantial," said a senior analyst with a Mumbai-based brokerage.

Adding: "Internal targets of companies are mostly aspirational in nature. It’s fine to have a target but for overtaking or even reaching near Infosys, which has 30 per cent higher revenue and ~200 billion cash reserve, HCL will need to grow at higher double digit for the next couple of years."

Noida-headquartered HCL has a turnover target of at least $15 billion by 2022-23