December 25, 2016 8:00 pm JST
Company in focus

India's HCL Technologies counters Trump-led US protectionist sentiment

Policy to hire American workers should give the IT company protection

KIRAN SHARMA, Nikkei staff writer

NEW DELHI -- On Dec. 8, thousands of supporters in a packed hall in Des Moines, Iowa vociferously cheered President-elect Donald Trump as he reiterated his campaign promise to bring back home millions of jobs that Americans have lost to foreigners.

"My administration will follow two simple rules -- buy American and hire American," he told the crowd. But a different audience was also listening to his comments -- that of equity investors in the information technology sector where highly skilled Indian engineers are greatly in demand.

"Can you believe that -- you get laid off and then they won't give you severance pay unless you train the people that are replacing you?" Trump said. "We won't let this happen anymore."

Such rhetoric has led to concerns that the Trump administration may restrict the issuance of H1B visas to import professionals with highly-specialized knowledge in such fields such as science, engineering and computer programming.

Trump could have also been referring to the case of two former Walt Disney World technology workers, Leo Perrero and Dena Moore, who filed a federal lawsuit against the Indian IT and consulting company HCL Technologies and U.S.-based Cognizant Technology Solutions that brought in foreign workers to replace them and nearly 250 of their colleagues in January 2015. The suits were dismissed by a Florida judge in October.

Since July, when Trump's chances of being elected president started to rise, share prices of major Indian IT companies such as Tata Consultancy Services, Infosys and Wipro fell. HCL Technologies proved to be the exception. On Dec. 23, HCL shares closed at 798.40 rupees, up 1.85% from 783.85 rupees on Nov. 9 when Trump was elected.

HCL Technologies, India's fifth largest software company, does not believe that it will be affected by Trump's threats. Asked about the possibility of a backlash against the IT industry in America after the debut of Trump-led government, HCL Technologies chief financial officer Anil Chanana told the Indian affiliate of CNBC that the company has taken steps to reduce reliance on visas. In addition, the company is carrying out a local recruitment program worldwide.

In the U.S., HCL Technologies hires about 16,000 staff and 65% are already American workers. With total of 110,000 employees and annual revenue of $6.6 billion, HCL along with its subsidiaries, operates in 32 countries around the world and is the third-largest business process outsourcing services provider in India. It offers services in technology, enterprise consulting, applications consulting and information technology-enabled and infrastructure businesses.

In contrast, HCL's Indian competitors have hired a lower percentage of Americans as part of their workforce in the U.S., with 50% of Wipro staff in the U.S. being locals and even lower percentages for TCS and Infosys, said Kuldeep Koul, senior research analyst at ICICI Securities in Mumbai. "HCL Tech is the least impacted by the H1B visa issue."

HCL's competitors rely more on the H1B visa program, under which 65,000 temporary workers and an additional 20,000 employees with advanced degrees from American universities are allowed to work in the U.S. every year. About 86% of these visas issued to workers in computer-related occupations in 2014 went to Indians, according to IT magazine, Computerworld.

Competitive edge

Chairman Shiv Nadar, 71, founded the company in 1976. An electrical and electronics engineer, Nader is considered a pioneer of modern computing in India. Under his leadership, HCL launched India's first 8-bit microprocessor-based computer in 1978, around the same time as Apple. In 2008, he was awarded India's third-highest civilian honor, Padma Bhushan, in recognition of his contribution to business and philanthropy.

"Other than us there was no one in modern computers," Nadar said in a video celebrating the company's 4oth anniversary. "40 years later there's still Apple... and HCL is still there. The rest came and went."

While other Indian IT service providers focused on software exports, HCL leveraged its expertise in computer technologies to supply and support IT hardware. It helped create the infrastructure backbone of the National Stock Exchange in early 1990s.

Its expertise in infrastructure management, which accounts for up to 40% of revenue, has helped HCL's share price. There has been a continuing demand for infrastructure services as U.S. companies invest more in IT renovation to implement cloud-based solutions.

Targeted sectors

Apart from infrastructure, HCL has worked with Hewlett Packard, Perot Systems, Deutsche Bank and Toshiba as it sought to become a global technology enterprise. The company has also entered the healthcare sector after it set up an unit in 2014 to meet the growing demand for quality primary healthcare in India, which was followed in 2015 by HCL TalentCare, an integrated talent solutions provider.

HCL's vision is reflected in the strategic acquisitions it has made, including Capital Stream, a U.S.-based company offering automation solutions in the financial services sector, for $40 million in 2008. It is also seeking deals in engineering and research and development, and recently announced the acquisition of India's Geometric for $200 million and U.S.-based Butler Aerospace for $85 million.

In the last financial year that ended in March 2016, the company reported significant growth in three sectors, including life sciences with a 27.6% year-on-year rise in revenue, public services that includes energy, oil, gas and utilities with 17.9% growth and telecoms with 22.4% growth.

Sanchit Vir Gogia, chief analyst at IT consultancy Greyhound Research in New Delhi, said that HCL's selection of businesses has led to its strong performance. "HCL Tech as a group has a huge focus on healthcare, manufacturing, life sciences, etc., that see higher margin work where digitization is happening."

Despite being smaller than competitors such as TCS, which is Asia's top software exporter, HCL's deep understanding of computing and evolving technology has boosted efficiency amid intensifying competition in the IT sphere.

HCL's average sales per employee was 3.45 million rupees as of June 2015, 11% higher than that for TCS in March 2016, according to equitymaster.com. In terms of average net profit per employee, HCL generated 689,000 rupees, which was 30.8% more than Wipro. But HCL's average wage was 40% higher than at TCS and 15.1% higher than at Wipro, possibly due to the hiring of more local workers in the U.S.

HCL's strategy has been met with favor by investors. HCL shares have outperformed those of TCS, Wipro and Infosys since 2009. This also reflects HCL paying a higher dividend, with dividend per share being 30 rupees in June 2015 against 27 rupees for TCS as of March 2016. Their dividend yield as per current valuation was 3.8% and 1.2% respectively, making HCL stock an attractive buy for investors.

For the September quarter, the company's net profit rose 17% year-on-year to 20.14 billion rupees. HCL's profit margins have been in line with street expectations. "This year, they are 9% higher in terms of organic revenue growth in dollar terms. In comparison, Infosys has given a guidance of 7.5-8.5%, and TCS of 7-7.5%. So, all that is reflecting in the stock," said Koul.

New visions

C. Vijayakumar, a company veteran who was appointed president and chief executive in October, told Business Standard that HCL has done "very well" in the last four years. "We had industry-leading revenue and margin growth, so I think as a company today we are uniquely positioned to win in the new world."

HCL is now focusing on high levels of automation with its DryICE platform, which employs artificial intelligence. Building on the expertise it has acquired since its exposure to automation technology in 2008, HCL aims to cater to a growing demand to automate jobs.

According to McKinsey Global Institute, the proportion of jobs that can be fully automated by adapting currently demonstrated technology is actually small-less than 5 percent. However, the share could rise to 15 to 20 percent as automation technology starts to replace middle-skill workers such as truck drivers and typists. MGI says at least 30% of activities related to 60% of all jobs can be automated. "The DryICE framework is emerging as a key differentiator on the cognitive and robotic process automation for 21st century enterprises," HCL said.

Nadar said that HCL's talent pool offers differentiated services and the company's engineering performance is "unquestionably the best in the world." HCL believes that businesses will keep depending on Indian IT services companies despite what happens in the U.S.

One of HCL's main challenges is how to absorb its relatively higher personnel costs while maintaining a competitive edge. Wages for IT workers in the U.S. are expected to keep rising as "skilled talent is in short supply," according to Robert Half Technology, an IT staffing company. It predicts salaries for data scientists and big data engineers will rise between 4.5-6.4% in 2017. As the U.S. economy continues to pick up, "professionals are difficult to hire given the high demand and short supply," it said.

So while HCL is likely to counter protectionist sentiment in the U.S. with the extensive hiring of local workers, it will have to pay the price of higher wages that are likely to affect profitability.

Apart from Trump's possible crackdown on Indian IT workers hired in the U.S., leading software exporters like Wipro, TCS and Infosys are closely watching the new U.S. leader's stance on offshore outsourcing. The U.S. has historically seen heated debate over offshore outsourcing as some camps have insisted sending work outside the country creates long-term structural unemployment.

For the $146 billion Indian IT services industry, the U.S. is the most important market since it provides 60% of revenue. The industry anxiously awaits the Inauguration Day in January.

Nikkei staff writer Rosemary Marandi contributed to this story

-- Company in focus

-- CEO in the news

Asia300

HCL Technologies Ltd.

India

Market(Ticker): BOM(532281)
Sector:
Industry:
Technology Services
Information Technology Services
Market cap(USD): 18,800.08M
Shares: 1,411.21M
Asia300

Tata Consultancy Services Ltd.

India

Market(Ticker): BOM(532540)
Sector:
Industry:
Technology Services
Information Technology Services
Market cap(USD): 73,102.65M
Shares: 1,970.42M
Asia300

Infosys Ltd.

India

Market(Ticker): BOM(500209)
Sector:
Industry:
Technology Services
Information Technology Services
Market cap(USD): 36,232.11M
Shares: 2,296.94M
Asia300

Wipro Ltd.

India

Market(Ticker): BOM(507685)
Sector:
Industry:
Technology Services
Information Technology Services
Market cap(USD): 19,046.15M
Shares: 2,430.89M

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