HCL ERS returns to Earth in Q4 FY19

/ May 19, 2019/ Financials, HCL Tech, India

HCL Tech’s ERS unit posted an excellent growth of +12.1% yoy at CC. The growth positioned ERS as the second fastest ER&D services vendor (among top ten vendors) behind Alten, ahead of Altran. ERS’s growth is, however, slowing from its peak of +47.7% at CC in Q3 FY18.

HCL Tech did not elaborate on why the growth of ERD has slowed down. We assume that more anything, the slowdown is related to software product engineering work related to its IP partnership with IBM. We are guessing that initially, IBM spent significantly on refreshing its products. IBM, once the product refresh completed and during its negotiation with HCL to acquire the seven IBM products), probably put its ER&D spending on a pause.

Looking ahead, HCL Tech is expecting to finalize the acquisitions of IBM’s seven software product by the end of May. We expect that IBM would have stopped most of its R&D activity until the deal is closed. Once the deal is closed, HCL will, in all likelihood, resume R&D spending. However, this spending will no longer be recognized as revenues but as internal R&D expenses. Unless HCL Tech closes additional IP partnership deals, the growth profile of ERS should be more traditional and closer to industry average.

We might get a better understanding of the dynamics at stake within ERS. HCL Tech just announced that it will change its segment reporting from Q1 FY20 onward, and provide P&L for ERS, along with Products & Platforms, and IT services (including BPO). We welcome this change!