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First, TPI data largely track deals involving presence of advisory third-parties in
the awarding of such deals. HCLT is more dependent on such deals than its larger
peers such as TCS/Cognizant. Peers typically depend much more on working with
and scaling up existing relationships (or “organic farming”) which may not
involve intermediaries such as TPI. Mature clients conduct their own RFP/RFI
procedures without relying much on the likes of TPI.
Second, TPI reports data only on deals on total contract value exceeding USD
25 million. Again expectedly, while bigger peers announce more large deals today
than before, large deals still contribute a rather low % of their revenues as the
business model of peers is fundamentally premised on farming.
Third, TPI’s data reports that the outsourcing activity of the Fortune-200 clients
advised by third-party intermediaries is low. In our view, it does not mean that the
large clients (typically, belonging to the Fortune-200 club) are outsourcing (or
offshoring) less. It might mean that this group is more mature by virtue of its
history at outsourcing and hence, likely to employ the services of third-party deal
consultants (such as TPI) for deal outsourcing less frequently than before.
Fourth, third-party mediated deals generally tend to get negotiated at stiffer terms
(realization, risk, pricing on aggressive outcomes etc.). Gross margins trend up
later in the life of the deal(s) and even then, are likely to be lower than what the
likes of TCS/Infosys/Cognizant are comfortable with. Thus, we believe that
there is some certain level of consciousness that higher-margin peers exercise
with regard to taking on (or not taking on) such deals.
For these said reasons, we believe that the opportunities that HCLT targets (e.g.
total outsourcing deals involving third-party deal advisors) may be quite different
from those of its peers. The overlap between the two markets may be minimal.
Implications for HCLT. Depending on new deals gives revenue visibility but
HCLT must think of how to extract better margins from such a business
model on an ongoing basis. Gross margins on new deals are lower than company
average in the initial phase (or first 12-18 months). As recent deals mature in their
lifecycle fetching better margins over time, there will be a steady influx of other
newer deals that will temper the company’s overall margin profile. Unless HCLT
structurally changes its mix of hunting (new deals) to farming in favor of the latter
(farming is more profitable than hunting), it is difficult to see gross margins at
HCLT improve. We maintain OW rating on the HCLT stock on reasonable
valuations. TCS (OW) remains our top pick.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
First, TPI data largely track deals involving presence of advisory third-parties in
the awarding of such deals. HCLT is more dependent on such deals than its larger
peers such as TCS/Cognizant. Peers typically depend much more on working with
and scaling up existing relationships (or “organic farming”) which may not
involve intermediaries such as TPI. Mature clients conduct their own RFP/RFI
procedures without relying much on the likes of TPI.
Second, TPI reports data only on deals on total contract value exceeding USD
25 million. Again expectedly, while bigger peers announce more large deals today
than before, large deals still contribute a rather low % of their revenues as the
business model of peers is fundamentally premised on farming.
Third, TPI’s data reports that the outsourcing activity of the Fortune-200 clients
advised by third-party intermediaries is low. In our view, it does not mean that the
large clients (typically, belonging to the Fortune-200 club) are outsourcing (or
offshoring) less. It might mean that this group is more mature by virtue of its
history at outsourcing and hence, likely to employ the services of third-party deal
consultants (such as TPI) for deal outsourcing less frequently than before.
Fourth, third-party mediated deals generally tend to get negotiated at stiffer terms
(realization, risk, pricing on aggressive outcomes etc.). Gross margins trend up
later in the life of the deal(s) and even then, are likely to be lower than what the
likes of TCS/Infosys/Cognizant are comfortable with. Thus, we believe that
there is some certain level of consciousness that higher-margin peers exercise
with regard to taking on (or not taking on) such deals.
For these said reasons, we believe that the opportunities that HCLT targets (e.g.
total outsourcing deals involving third-party deal advisors) may be quite different
from those of its peers. The overlap between the two markets may be minimal.
Implications for HCLT. Depending on new deals gives revenue visibility but
HCLT must think of how to extract better margins from such a business
model on an ongoing basis. Gross margins on new deals are lower than company
average in the initial phase (or first 12-18 months). As recent deals mature in their
lifecycle fetching better margins over time, there will be a steady influx of other
newer deals that will temper the company’s overall margin profile. Unless HCLT
structurally changes its mix of hunting (new deals) to farming in favor of the latter
(farming is more profitable than hunting), it is difficult to see gross margins at
HCLT improve. We maintain OW rating on the HCLT stock on reasonable
valuations. TCS (OW) remains our top pick.
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