The success story of Indian software services continues despite the temporary blip post the tech meltdown. However, the curve has always been an upwardly moving one. This shows the resilience of the sector to the continuously increasing domestic salaries as well as the recent upswing in the dollar. It has also been able to thwart the impact of a number of global companies setting up their offshore bases in India or acquiring Indian companies.

All this goes only to prove that the success of the Indian software services sector is no flash in the pan working on the wage arbitrage, but a well-oiled business model that is reasonably strong to withstand a number of challenges. Noida-based HCL Technologies is one of the companies that have been moving steadily toward becoming global software giants.

HCL Technologies, part of the HCL Group, is providing software-led IT solutions, remote infrastructure management services, and BPO. The company leverages an extensive global offshore infrastructure, and its global network offices are in sixteen countries to deliver solutions across select verticals including financial services, retail and consumer, life sciences, aerospace, automotive, semiconductors, telecom, and media publishing and entertainment.

Its president, Vineet Nayar, has been the key driver of the company's success. An engineer, Vineet also holds a masters' degree in business administration from XLRI, Jamshedpur. He has been acknowledged as one of India's Hottest Young Achievers by Business Today in 2002. He started his career with HCL as a senior management trainee in 1985. He was appointed as CEO of the infrastructure business in 1993, before assuming the position of president, HCL Tech in 2005.

In India, the company delivery centers are located at Noida, Gurgaon, Chennai, and Bangalore, and its global delivery centers are at Belfast, Kuala Lumpur, and Northern Ireland. Its customer's list includes Boeing, IBM, AutoDesk, CISCO, KLA, G-TEC, Deutsche Bank Group, and Jones Apparel. Promoters hold 67%, institutional investors hold 22%, Indian public holds 7%, and others hold the rest 4% of the stake.

The company reported strong annual results for the financial year ended June 2006. HCL Tech earned consolidated revenues of Rs 4,388 crore, registering a 30.5% growth over the previous year, which was Rs 3,363 crore. The net profit for the same period was up by 27.1%, amounting to Rs 773.1 crore as compared to Rs 609.1 crore achieved in the previous financial year.

During the quarter ended March 2007, the company reported a revenue growth of 7.6% q-o-q, and 39% y-o-y to Rs1, 577 crore. The sequential growth was contributed by a growth of 16.4% in the company's BPO revenues. Infrastructure management service, and core software service business grew at a relatively lower rate of 6.4% and 6.5% respectively on a sequential basis. The EBITDA margin has improved by 115 basis points to 23.3% on a sequential basis, despite the adverse impact of the appreciating rupee. The earnings grew at a robust rate of 15.9% q-o-q and 72.1% y-o-y to Rs 331.8 crore. The company has added 7,523 employees in the first nine months. During the next quarter, the employee additions are likely to be robust, as the company has given around 5,000 offers to engineering graduates passing out this year.

During the financial year, the company's joint venture with NEC came into operation. It will jointly address the Japanese market that has been difficult to penetrate for most Indian companies. Among other notable events, the company signed a royalty based product engineering agreement with Cisco. HCL Tech also announced a long-term partnership with DSG International for a wide gamut of IT related services. It also signed a distribution agreement with Qumas for its enterprise compliance solutions in the Asia Pacific region, and a multi-million dollar agreement with MSC Software for rollout of Oracle11i applications worldwide. In overall terms, the company focused more on large orders and partnerships rather than M&A activities. The focus has been on developing internal processes and practices to control costs, and improve productivity.


Moreover, the company continues to bag new multi-million, multi-year, multi-service deals, and has announced six new deals in Q3-five in the range of $25-50 mn each, and one worth over $50 mn. During the quarter, the company also has signed an MoU with the government of Maharashtra toward allotment of 170 acres of land in the MIHAN SEZ at Nagpur. The company entered into a strategic partnership with Saudi Arabia's leading Advanced Electronics Company, and Eckler with an objective of deepening the company's insurance domain expertise. Under the alliance, the company and Eckler will work together on various actuarial consulting, and Implementation projects across the globe. The company and Hewlett-Packard inaugurated EnsureIT, an IT management program, resulting in assured IT performance for the company's BPO division.

The company remains optimistic about its future performance, and given the continued new client sign-ups and the favorable business environment, the company is likely to maintain its growth and margins in the near term.

The shares of HCL Tech trade at Rs 342, discounting its 2007 and 2008 earning by 9 times and 7 times respectively. This compares favorably to its peers, and we believe that it gives a scope for appreciation in the medium term.
Outperformer.

Sushanto Mitra
The author is director, Techcap India
sushanto@techcapIndia.com
The views reflected here are of the author and not of this publication.
No liability is accepted for losses based on the information presented here

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