HCL’s software products business falls short of profitability expectations
BENGALURU : HCL Technologies Ltd’s bet on software products has not yielded profitability of the kind its management expected, five years after the Noida-based company purchased eight software products from IBM. The business unit saw a 680-basis point decline in operating margins from FY20 to FY24, despite a $271-million increase in revenue in the same period.
HCL Technologies had bought the eight products from IBM in December 2018 for $1.8 billion (the acquisition was completed in July 2019), the largest purchase by an IT services company at the time, and marking a rare incursion by any Indian service provider into the highly competitive software products arena. But profitability of the unit, rebranded HCLSoftware in June 2022, has been falling each year since the IBM transaction barring FY23 (see chart).
It has also not matched expectations. The company’s target profitability of 30% for software products, which it had outlined in a presentation after the IBM deal, has been met only once, in FY20, according to a Mint analysis.
Also read: HCL makes $1.8 billion bet with IBM software deal To be sure, in FY24, the operating margin of the software products business was much higher at 24.7% than its overall operating margin of 16.9% (for HCL’s core IT and business services vertical). On the other hand, operating margins of the IT and business services vertical, too, fell in the four fiscal years through FY24, but at a much lower 80 basis points.
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