Will Reader's Digest bankruptcy impact HCL Tech deal?

In a report in Economic Times today, it said that the Readers Digest Association (RDA) initiating bankruptcy proceedings might hurt HCL Technologies outsourcing deal with RDA. In 2009 HCL Tech signed a 7 year outsourcing deal with Readers Digest for infrastructure management and application development and other related services that encompassed Reader's Digest's operations in 45 countries cutting across North America, Latin America and Asia.

It is unclear what will be the likely impact of this development for HCL Tech and analysts feel that if Readers Digest revives, it will be business as usual for HCL. It may be recalled Readers Digest is going through bankrupt for the second time in the last 3 years, and in 2009 it faced a similar situation. But it was the year HCL entered into the deal, and hence in 2009, its risk was less compared to now as it was mid-way through the deal.

Looking at the current status of the deal, the ET report said, "For services rendered so far, HCL Technologies has claimed $4.3 million (Rs23 crore) from RDA, according to documents filed with the US Bankruptcy Court in southern district of New York on Sunday. This is the second time RDA is going into bankruptcy proceedings after 2009, when it first filed for bankruptcy, but successfully came out of it in 2010. Interestingly, the company also lists a claim from Wipro for a sum of close to $1 million. RDA hopes to come out of the restructuring in six months, with 80% reduction in debt liabilities.

While HCL Tech will get paid for its services rendered to RDA, the cause of concern would be that on its course to revival, if RDA changes its tech outsourcing strategy and in the event of cancelling the deal will take out a big chunk of pipeline business for HCL Tech.

Reflecting on this ET report quoting analysts said, "They (HCL) may face a write-down of any outstanding receivables. If the firm comes out of Chapter 11 (bankruptcy), they will be fine," said Peter Bendor-Samuel, founder and chief executive officer at outsourcing advisory Everest Group. "However, if they go into Chapter 7 (shut down) or get sold then HCL will most probably lose the contract."

However its very early days to come out with any conclusion and since both parties had declined to comment on the impact, it's a wait and watch game as of now.