‘Re-badging’ may strain margins.

BL Research Bureau

Chennai, March 16 The $350-million deal that HCL Technologies has managed to win from Reader’s Digest Association (RDA) appears to be one of largest in recent times in the IT deal landscape.

But this may not be cause for great cheer as it is spread over seven years, making for annual run-rate of $50 million, which is a little over two per cent of HCL Technologies’s revenues.

The deal looks to leverage its leadership among top-tier IT services companies in the infrastructure management services space.

Currently such services provide 15 per cent of HCL Technologies’s total revenues. HCL Technologies will offer end-to-end services spanning the entire IT infrastructure and applications. This involves RDA’s operations across 45 countries.

The deal envisages HCL Technologies making RDA’s IT landscape from a “site heavy” model to a “central heavy and site light” model. Simply put, this means that more work would be moved and managed from offshore destinations (mostly India and other low-cost destinations). This could optimise costs for HCL Technologies.

But an important caveat here is that there is re-badging involved in the deal, which means that HCL Technologies would have to absorb some of RDA’s employees. Taken together, the deal may not significantly expand margins for HCL Technologies, though it does aid revenue visibility.

The stock of HCL Technologies reacted with some cheer to the deal and was up over five per cent on Monday.

(This article was published in the Business Line print edition dated March 17, 2009)
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