HCL Technologies bets on emerging markets to drive growth

If sources are to believed, HCL Technologies Ltd. is betting on emerging markets to drive its revenue growth over the next several years, as developed countries in the West continue to grapple with economic uncertainties.

Indian information technology companies such as New Delhi-based HCL Technologies get most of their business from the U.S. and Europe by offering services like computer software and back-office support at a fraction of cost their clients in developed markets would locally acquire.

But, budget cuts by traditional customers, the European debt crisis and a slow recovery in the U.S. have made these IT companies to diversity their markets, especially into countries in Asia, Africa and Latin America where several economies are growing at a fast pace again after shrugging off the effects of the slowdown.

They are investing in the emerging market thinking that this market will grow faster than the rest of the world, according Virender Aggarwal, executive vice president and head of Asia-Pacific, Middle East and Africa at HCL Technologies. The growth story seems to be continuing in emerging markets, making the overall outsourcing demand environment stable to good.

Tata Consultancy Services Ltd., India’s top IT Company by revenue reported a better-than-expected 30% jump in third-quarter consolidated net profit, helped by a sustained rise in outsourcing orders. Infosys Technologies Ltd., the second largest, however missed the forecast last week though its profit rose more than 14%, and cautioned that a slow economic recovery in developed markets and currency fluctuations could derail growth of India’s outsourcing sector this year.

According to Aggrawal, the company has to hedge its bets outside of two main markets–the U.K. and Americas, but didn’t give any financial forecast. It gets more than 15% of revenue from markets such as Asia, Africa and Australia, compared with about 12% four-five quarters back, he said. The strong growth in emerging markets is partly driven by demand for banking and financial services.

In Africa, HCL Technologies is experiencing higher demand from telecommunications companies after mobile-phone services provider Bharti Airtel Ltd. entered that market last year, replicating its successful Indian business model of outsourcing technology operations.

Aggrawal added that Bharti’s move has fuelled the demand for outsourcing services from African telecom companies, which are looking to cut costs and focus on core competencies. The company is also witnessing higher demand from mining, commodities, oil and retail companies in Africa. Contracts in most emerging markets are small in size–worth $10 million-$20 million and spanning several years. Orders from Australia and New Zealand are worth $50 million or more and are comparable with other developed markets. Emerging markets offer also smaller operating margins, but there’s nothing to worry.  The company plans to expand its presence into markets like Kenya and the Philippines, encouraged by the strong growth in those economies. It already has operations in Russia, Indonesia, Saudi Arabia and Turkey.