HCL’s ERS Manages Well the Downturn Thanks to its Balanced Client Base

/ July 20, 2020/ HCL Tech

HCL’s ERS Showed Good Resilience in Q1 FY21

HCL Tech reported good set numbers for its Engineering and R&D Services (ERS) business in Q1 FY21. Revenues were down by 5.1% at CC to USD 378m. The growth is mostly organic (CS) and only includes an estimated USD 5m in acquired revenues, resulting from the Sankalp acquisition. This positions ERS among the best-performing units this quarter.

ERS owes its resilience to its balanced client base and its lesser dependency on automotive and aero. Asset-heavy industries, which include aero, auto, office automation (i.e., the key Xerox client) and other industries, represent a bit less than 50% of revenues. The company suffered in asset-heavy industries, unsurprisingly, in Q1 FY21.

Meanwhile, asset-light industries, i.e., ISVs, online consumer electronics, semiconductors, and telecom, were resilient. ERS has not seen any specific downturn impact on these industries, apart from the general COVID-19 situation and WfH consequences. HCL Tech’s comments about the asset-light industries were broadly in line with the competition commented.

ERS Has Strengthened its Semiconductors Capabilities with Sankalp

One surprise though was the performance in semicon. Most competitors, e.g., Altran and Alten, have suffered in this space. HCL Tech acquired Sankalp, a semiconductor engineering specialist in H2 2019: Sankalp is a small vendor, with FY19 revenues of approximately USD 20m. So, the impact was not significant to ERS in financial terms. Also, given the market conditions, ERS must have found it challenging to cross-sell ER&D services to an industry currently in decline. For some reason, ERS’ semiconductor client base kept its ER&D spending stable.

ERS has hit the bottom in Q1 and expects a rebound in Q2, driven by asset-light industries, despite the offshoring impact of large deals transitioned last year. No surprise here.

HCL Is An Example for the European Onshore Industry

The satisfying performance of HCL Tech (and Wipro: -3.5% at CC) in the ER&D space backs what ERDservices.org has reiterated several times. European ER&D vendors need to further diversify their client base to the US high-tech sector, in particular ISVs and the cloud giants, along with Medtech. With enterprise clients accelerating their adoption of digital (e.g., online services) and cloud services (e.g., AWS, Microsoft Azure, Google Cloud Platform), the US high-tech sector is a good place to be for ER&D services. However, this is easier said than done. Servicing the US high-tech sector has deep implications for European vendors: an offshoring presence, more capabilities in adjacent services such as product design, cyber-security, data and analytics, connectivity. The transformation will not be an easy journey, and so far, only Altran had done it.

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