Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Strong business risk profile, marked by presence across diverse verticals and service lines, and healthy operating profitability - HCL Technologies is the third-largest, listed Indian information technology (IT) services provider in terms of revenue. It has established a diverse industry-vertical portfolio which has enabled it to better mitigate the Covid-19 induced sector-specific slowdown in fiscal 2021. Financial services segment contributed 21.9% of revenues during fiscal 2021, followed by manufacturing (17.9%), technology & services (17.4%); other segments in life sciences & healthcare, retail & CPG and others contributed the remaining 42.8%.

The company has further strengthened its capabilities in IT products and platforms segment with the acquisition of IBM’s intellectual property rights for seven of its product suites in fiscal 2020. This has additionally provided access to a large addressable market across geographies and niche technological capabilities. Over the past two years the company has been steadily increasing its share of digital revenues driven by its ‘Mode 2’and ‘Mode 3’ segment (contribution has increased from 23.4% in fiscal 2018 to 38% in fiscal 2020). The major acquisitions including Actian and C3i Solutions (in April 2019) and DWS (in September 2020) will further support this long term business expansion towards providing digital solutions.

The continuous improvement in efficiency parameters, profitable monetisation of acquired IP assets and increasing contribution from higher-margin digital contracts will help mitigate the pressure created on operating margins by the industry-wide issue of increasing employee costs, investments for enhancing capabilities as well as regulatory compliance.

Healthy financial risk profile – Healthy capital structure with comfortable gearing at 0.07 time, large networth of Rs 57,987 crore and cash and cash equivalents of Rs 15,665 crore as on March 31, 2021. Debt-protection metrics are robust, with interest coverage ratio of 39 times and net cash accrual to total debt ratio of 3.2 times in fiscal 2021. HCL Technologies is expected to invest in niche acquisitions to strengthen its existing portfolio in the medium term and will be largely funded from its cash surplus and healthy accruals.

Weakness:

Exposure to intense competition in the IT industry – Company has to compete with Indian IT majors such as TCS, Infosys (rated CRISIL AAA/Stable/ A1+), Cognizant, and Wipro; and also global players such as IBM, Accenture, and DXC Technology. CRISIL believes that though HCL Technologies, with its diversified service and vertical mix along with deeper client mining, will continue to register healthy revenue growth over the medium term; albeit it will remain exposed to intense competition from its peers in the industry. CRISIL also believes that to leverage the opportunities arising in the global markets and cushion medium-term volatility, domestic IT companies will need to realign their cost structures and improve operating efficiencies and financial flexibility.