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Bengaluru: HCL Technologies Ltd lost at least $1.5 billion worth of contracts that came up for rebid over the past two years, according to four people familiar with the matter.

That is a high number, considering the fact that an information technology (IT) firm of HCL’s scale, with $6.23 billion in revenue for the year ended March 2016, typically sees average annual business erosion of 3-5% of total revenue.

HCL’s net erosion in the last two years surged to more than 20%, according to the people, including two company executives and one executive from an IT advisory firm.

This explains why revenue growth at India’s fourth largest software services exporter has slowed, despite its claims of having won over $9 billion in new deals over that period.

The trend is worrying analysts, as the company will see the highest number of contracts from its current portfolio come up for renewal in the current financial year.

The road ahead could get rocky unless HCL finds a way to retain old customers, they said.

“Unless HCL Technologies can retain 90%+ of its overall annual business that churns/renews, it will struggle to hit sustainable double-digit % revenue growth, current robust total contract value of new deals notwithstanding," JPMorgan Chase and Co. analyst Viju George wrote in a note last month.

HCL declined to give details of the lost business, claiming that the “retention rate for deal renewals is at 98%".

So what is making it hard for HCL to keep clients happy?

For starters, its inability to cross-sell more services to existing clients is a key factor, forcing many of them to switch as they try to get more work done by fewer vendors.

Also, a lot of HCL’s old infrastructure maintenance contracts are getting squeezed as clients shift to cloud computing offered by Microsoft Azure and Amazon’s AWS.

Those were the two primary reasons why over a dozen clients, including UBS Group AG and Microsoft Corp., switched to HCL’s rivals.

“Certainly we have seen some of the clients you mentioned move their existing infrastructure workloads to the cloud. And this is one of the reasons behind the drop in growth rates," said an HCL executive who did not want to be named.

HCL maintained the data centres of many of these clients when it initially won those contracts.

Another reason for HCL’s slow growth, despite claims of having more than $15.5 billion in new deal wins over the last few years, is that it seems to be including costs of hardware deployed while announcing the deals it bagged.

This inflates the deal size even when the IT vendor does not make much money on the hardware deployed in contracts, analysts said.

“There is some element of hardware purchase in the deal total contract value (some of the infrastructure deals can include hardware, bandwidth purchase and data centres, amounting to up to 40% of the contract value that does not pass through profit and loss statement)," according to Yogesh Aggarwal, the head of HSBC’s India research practice.

To be sure, the HCL management, since July-September 2012, has been claiming to have won more than $1 billion in new contracts every quarter, and for this reason, Mint first questioned the disconnect between HCL’s new deal wins and revenue growth on 2 October last year.

From 1 July 2012 until 31 March 2016, HCL managed to increase its revenue by $2.13 billion on the back of $15.5 billion worth of new deals.

This pales in comparison with HCL increasing its revenue by $2.2 billion on the back of $8 billion new deal wins in the four years starting 1 July 2008 to 30 June 2012.

HCL reported a 11.6% rise in revenue growth in constant currency terms (7.1% in dollar terms), lower than industry body Nasscom’s estimate of 12.3% revenue growth, in 2015-16.

A spokeswoman for HCL declined to comment on the client names and value of business lost to rivals in rebids, citing client confidentiality. However, she maintained that the company’s “retention rate for deal renewals is at 98%".

Equity analysts, understandably, question why, despite this high retention rate, HCL’s weak client mining makes it difficult for the company grow faster.

“To be sure, HCL Technologies’ retention rate in infrastructure management services deals coming up for renewal at 98% is remarkable but what is to say that there aren’t leakages/churn elsewhere, especially in its applications portfolio?" questioned JPMorgan’s George.

On a base of new deal wins of $5 billion annually, HCL should generate about $300-400 million in the first year and $1 billion in the second year, effectively, bringing the total revenue to about $1.3-1.4 billion in two years, he pointed out.

However, HCL added $413 million in incremental revenue last year and added $590 million in new business in the financial year 2014-15.

“We estimate that HCL Technologies is going through peak renewals in FY16/17, putting further pressure on growth and margins," wrote HSBC’s Aggarwal.

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