HCL Technologies’ move to carve a separate division for its product and platform business is seen as a step in the right direction, to scale the business faster.
Starting this July, the Noida-based firm launched a business unit called HCL Software, bringing all the IBM intellectual property (IP) partnerships and acquisitions under it.
“Software and services businesses are quite different, with different business models, capital allocation, talent models and rhythm to revenue and profits. Hence, it would (have been) shocking if HCL did not split out its software and IP into a different division,” said Peter Bendor-Samuel, founder and chief executive officer (CEO) of research entity Everest Group. “In splitting them out, the firm is adopting a well-tested approach that IBM has used for a long time.”
The new unit (HCL Software) is being headed by Darren Oberst, corporate vice-president for products and platforms at HCL. He was formerly handling the platform business at IBM.
“As the (product) business is a little different from the services business, we are creating an eco-system to enable its growth by creating a dedicated sales and marketing channel, and product management (among others),” C Vijayakumar, president and CEO at HCL, had said at its June quarter results announcement.
According to Prateek Aggarwal, chief financial officer at HCL, a separate division would also help investors to gauge the return on capital employed in the product business. “Over the last three years, we have invested more than $3 billion on this business, one of the reasons for carving it out as a separate division, so that investors can see the returns at large from this segment,” he said.
Late last year, the Shiv Nadar-promoted firm had announced it would spend around $1.8 billion to acquire select IPs from IBM.
It has paid $812 million till now and is to pay the rest in tranches over the next year.
“HCL is putting a huge stake on the ground with its software investments, especially the focus on its DRYiCE platform and smart digital assistant ‘Lucy’, its impressive digital assistant. I believe this sets HCL apart from its competitors, though there is a long road ahead,” said Phil Fersht, founder of consultancy HfS Research.
Experts say with such a substantial bet on the products and platform business, hiving off of this division into a separate entity can’t be ruled out. “I don’t anticipate a spinoff to occur before this division hits critical mass in terms of (annual) revenue, which could be close to $1 billion,” said Hansa Iyengar, senior analyst at London-based Ovum Research.
In the June quarter, HCL posted an industry-leading revenue growth rate of 17 percent year-on-year. Tata Consultancy Services’ was 10.6 percent and Infosys’ 12.4 percent, in constant currency. HCL says it expects revenue growth of 14-16 percent in constant currency this financial year.―Business Standard