CSC tie-up may help HCL Tech’s software services business
Computer Sciences Corp. (CSC) and HCL Technologies Ltd have tied up to modernize the applications of enterprise clients and transition them to the cloud. The two companies said that the partnership will be limited to the application modernization piece, a new business area, and that the two firms will continue to bid separately for other parts of a client’s business. It’s rather rare for competitors to get into partnerships, and it’s not very clear to what extent the partnership will scale up.
HCL Tech, which is less than one-third the size of CSC, bring to the table? One analyst with a multinational brokerage suggests that CSC’s offshore capabilities are limited, and the partnership will leverage on HCL Tech’s offshore strengths, while also leveraging on CSC’s cloud capabilities. The joint press release states: “As part of the partnership, HCL will white label CSC’s BizCloud, industry leading, highly secure and highly flexible private cloud offering for the enterprise.”
If the partnership prospers, it will help HCL Tech’s software services business, which has been struggling for growth. Besides, since the partnership will initially focus on the banking and financial services vertical, it will help HCL Tech build its presence in the sector. It currently gets only 26% of revenues from the sector, which is lower than the corresponding proportion for its larger peers.
There have been somewhat similar deals in the past, such as when Electronic Data Systems Corp. (EDS) announced Cognizant Technology Solutions Corp. as an alliance member to support its global delivery model. The alliance didn’t scale up much and within a year EDS announced the acquisition of MphasiS Ltd to bolster its offshore capabilities. Needless to say, it remains to be seen how far CSC’s and HCL Tech’s partnership goes, as they will also be competing with each other in other deals.
Meanwhile, HCL Tech is expected to report moderate growth in the December quarter on Thursday, aided again by its fast-growing infrastructure management services (IMS) business. Analysts at Kotak Institutional Equities expect overall revenues to grow by 3.6% sequentially, on the back of an 8% growth in the IMS business. Margins are expected to decline, thanks to salary revisions and a slight appreciation in the rupee. Besides, the company’s margins have had a dream run and, along with the above factors, may result in a breather. HCL Tech shares have more than doubled in the past year, and unless there is a major earnings surprise, its shares should be range-bound. It’s too early to conclude what impact the deal with CSC will have on its financials.