MOSL: HCL TECHNOLOGIES (Neutral)-Moves from partnering to buying IBM’s product IPs

HCL Technologies: Moves from partnering to buying IBM’s product IPs; We remain cautious given legacy/on-premise nature of some products

(HCLT IN, Mkt Cap USD18.9b, CMP INR962, TP INR1100, 14% Upside, Neutral)

HCLT has moved beyond partnering with IBM to acquiring some of the latter’s product IPs, which it believes are a reflection of its focus on the strategic segments and efforts to expand services to a gamut of clients across industries and markets. In this note, we highlight the key specifics of HCLT’s announced deal with IBM.

• TRANSACTION: HCLT announced the purchase of seven software products from IBM at a total cost of USD1.8b. The deal is expected to complete over the next six months. The products span across areas such as Application Security, Endpoint Management, Low Code, Digital Commerce and Experience, and Marketing Automation.
• PAYMENT: Of the total investment of USD1.8b, 48% will be made at the completion of the transaction and the balance one year thereafter. HCLT will raise debt of ~USD300m to fund the transaction.
• RATIONALE: This is the single largest investment in HCLT’s attempt to scale its Products and Platforms (Mode-3) business, as it seeks to add software product capabilities to its Services business. The market opportunity for these products in areas of Security, Marketing and Commerce is pegged at USD50b+. HCLT had already signed licensing partnerships in five out of these seven IPs, lending 2+ years of experience in engineering and modernizing these products. Part of the strategic rationale is also to serve and grow 5,000+ global enterprises.
• FINANCIALS: Incremental revenues from these products are expected to be USD625m in the first year and USD650m in the second year. EBITDA margin is 50%+. HCLT expects cash EPS accretion of ~15% from the transaction. However, the amortization schedule (not disclosed) will soften the impact on reported EPS.