HCL Tech : The Challenger

The landscape of the Indian software services companies has remained placid
with big companies maintaining their respective positions with little challenge
from mid-market players. The reasons for this are not hard to find. Post the
dotcom and 9/11, mid-market companies were hit severely by vendor consolidation
and rising marketing overheads. Bigger companies benefited from these trends and
further consolidated their positions by aggressive acquisitions.

Among the companies that remain nimble footed and could provide some
challenge to the biggies is Noida-based HCL Technologies. While the company
remains behind the top three, it has the potential to reach out faster than ever
before.

HCL Technologies is one of Indias leading global IT services companies,
providing software-led IT solutions, remote infrastructure management services,
and BPO, and is part of the HCL Group founded by Shiv Nadar.

Vineet Nayar, CEO, HCL Tech, has been a key driver of the companys recent
successes apart from the legacy of the HCL Group.

Promoters of the company hold 67.53%, FIIs hold 16.6%, institutional
investors hold 5.99% with the Indian public holding 6.94% stake and others hold
2.76% of the stake.

The company reported strong annual results for the financial year ended June
2007. HCL Tech earned consolidated revenues of Rs 6,068.74 crore, registering a
33% growth over the previous years revenue (Rs 4,571.58 crore). The net profit
for the same period was up 91% (at Rs 1,318.31crore) as compared to Rs 690.67
crore achieved in the previous financial year.

During the financial year, HCL Tech entered into a five-year, $70 mn
multi-service outsourcing deal with Teradyne, a supplier of automatic test
equipment. Similarly, the company won a contract to supply DO-178B software to
turbo power systems, for equipment in support of the Boeing 787 Dreamliner
program. HCL Tech and Crane Aerospace and Electronics signed a memorandum of
understanding (MoU) for a long-term strategic partnership.

HCL Tech also entered into an agreement with SIDBI (Small Industries
Development Bank of India) to implement an integrated enterprise-wide IT
solution for delivering increased efficiency in its business operations and
reducing response time to SME customers in credit delivery.

The company posted a net profit of Rs 332.9 crore for the quarter ended
December 31, 2007 as compared to Rs 286.2 crore for the quarter ended December
31, 2006, a y-o-y increase of 16.3%. And with a revenu increase from Rs 1,465.1
crore for the quarter ended December 31, 2006 to Rs 1,816.6 crore for the
quarter ended December 31, 2007, a y-o-y increase of 24%.

During the quarter, HCL Tech bagged a contract for providing mobile and
remote working solution for Wiltshire Police valued at $4 mn. North Dakotas
workers compensation agency also selected HCL as the systems integrator for
implementing Valley Oak iVOS Claims Administration Software.

HCL Tech expanded its global services partnership with Sap AG. This
partnership is aimed at enabling companies of all sizes to access the business
benefits of enterprise service-oriented architecture. HCL Techs Electro
Magnetic Compatibility (EMC) and Durability Test Lab, located at Chennai,
obtained the ISO/IEC 17025 Accreditation from NABL.

Among management changes, Anant Gupta, senior corporate vice president, HCL
Technologies, was appointed president. Similarly, Vineet Nayar, president of the
company, was appointed CEO, and Shiv Nadar will be the chairman and chief
strategy officer of the company.

The acquisition is an all-cash deal worth about $40 mn. Similarly, the
company, through its subsidiary HCL America, acquired the balance 41.9% stake in
HCL EAI Services from other shareholders making it a 100% subsidiary of the
company. The total consideration for the said transaction was $3.48 mn.

The shares of HCL Tech currently trade at Rs 281 discounting its earnings for
FY 09 by twelve times, which, and given the overall slowdown expected in the US
economy seems quite reasonable. We believe that the company will continue to
show moderate topline growth amid stable margins in the near term and move in
line with the rest of its peers. Market Performer.

Sushanto Mitra

The author is director, Techcap India

sushanto@techcapIndia.com

The views reflected here are of the author
and not of this publication.
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