HCL wins more plaudits, but was Cognizant the big success?

I blogged earlier this month about how HCL was the fastest growing of the Indian suppliers.

HCL Technologies reported global revenue of $2.186bn in 2009 which was 27.6% more than the $1.713m in 2008. It is now the 60th biggest global player in revenue terms.

HCL says its success is down to its business transformation, which included broadening its portfolio and empowering its staff.

If my praise was not enough Datamonitor now says HCL Technologies was number one in traditional IT outsourcing space 2009-10  in The Black Book of Outsourcing.

I have spoken to lots of people since and it seems, in terms of organic growth, Cognizant was the best and HCL benefited from its acquisition of SAP supplier Axon.

Cognizant grew revenues were $3.146bn in 2009 compared to $2.703bn in 2008. This was a 16.4% increase. It is ranked 42 in the world.

Lee Ayling, UK managing director at sourcing consultancy Equaterra, says HCL and Cognizant are doing well for different reasons.

“Cognizant is is being aggressive in Europe ion the traditional application space and doing a good job. HCL is going for a broader portfolio.”

He says there is room for growth. “They are both seen as new entrants in some of the markets dominated by the big Indian and US suppliers.”

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Cognizant added more revenue than TCS, Infosys and Wipro combined in the last 12 months (April 2009 to march 2010). During that period, Cognizant added $574 million compared to the $532 million added by the Big 3 combined. HCL Technologies usually does not even get talked about in the same league as the other 4.

One of the reasons is their poor financials and the other is their inconsistent performance (barring the alst two years). Last week CLSA securities put out a report highlighting the sloppy balance sheet of HCL. Something similar is what has pulled down companies.

It highlighted 4 concenrs.

1. Almost entire increase in revenues for HCL in the last four quarters has been accompanied by an equivalent increase in receivables.

2. Deferred cost (expenses incurred but not recognised in the P&L) has consistently increased through the last few quarters.

3. Operating cash flow as a % of Ebitda at ~52% has been much lower c.f. Tier-1 IT peers (Tcs, Cognizant, Infosys and Wipro) who are at 87-90%.

4. ROIC which was already at a discount to Tier-1 peers has continued to deteriorate through the last four quarters.

Sometimes when a company's CFO changes every few years, you usually smell a stinking rat!

The purchase of Axon has had a big affect on the HCL books.

Karl has mentioned before that HCL are already on their way to having 85% locals. This will affect their profits but could put them well ahead of the curve compared with Infy, TCS, Wipro and Cognizant. With increasing restrictions on employer sponsored visas in their biggest markets, they might have to do the same and that will impact their p&l as well. Also the Indian government might decide the tax breaks and endless tax disputes with these companies need to come to an end. The days of 25% profits after tax may be over.

While HCL has taken an "Employee First, Customer Second" approach, Cognizant has taken a "Customer First" approach.

Ironically, Cognizant has greater appeal in campuses, attracts the best of the lateral talent, has the lowest employee turnover in the industry, and grows the fastest. Interestingly, the current issue of Business Today magazine in India ranks Cognizant as the top recruiter across management schools and engineering schools in India, across indsutries. Cognizant has outperformed McKinsey, Goldman Sachs and P&Gs of the world in management schools and other tech companies in engineering schools. HCL Technologies is nowhere to be seen.