HCL Technologies Joining The $bn Club

As one more company joins the billion dollar club of Indian software services
companies, it's time to celebrate and take stock of the overall situation for
the software services sector. We believe that such landmarks continue to prove
that the Indian software story remains strong and will continue to show topline
growth of 30% and above for the leadership companies. At the same time, the
falling margins across the board remain a cause of concern. There is little that
can be done on this unless the companies take up cost reduction as an integral
part of their overall business strategy. Few companies are focusing on this at
the moment and we believe that the companies, while will finally win the war
will be those who focus simultaneously, on both growth and cost reduction.

Noida-based HCL Technologies is the new entrant to the billion dollar club.
Like its counterparts, HCL is facing a gradual decline in margins as the company
takes on larger and larger contracts. We believe that the company is yet to take
significant steps to reduce costs, and until such time, will have challenges in
getting better valuations.

HCL Technologies is fifth largest player in the Indian software services
industry, providing services in the area of embedded products, product
development, Internet, e-commerce, and networking area. The company provides
software-led IT solutions, BPO and remote infrastructure management services
across focused verticals such as BFSI, insurance, networking, life sciences,
retail, telecom, transportation, and utilities among others. HCLT provides a
wide array of services. These include process consulting SCM, CRM, B2B, Web
applications, mobile technology and applications, networking, application
production support, application maintenance and development, porting/migration,
and CAD/CAM/CAE among others. These offerings are strengthened through a set of
strategic alliances, joint ventures, acquisitions, and subsidiaries that extend
the company's expertise and stretch its capability to additional areas.

The company's delivery centers are located in Noida, Gurgaon, Chennai, and
Bangalore in India, and globally in Belfast, Kuala Lumpur, Malaysia, and
Northern Ireland. Its customer list includes Boeing, IBM, AutoDesk, and Cisco
among others.

HCL Tech's current equity stands at Rs 64 crore. Promoters hold 69.4%,
institutional investors hold 21.1%, Indian public and others hold 9.3%.

The company reported healthy annual results for the
financial year ended June 2005. HCL Tech earned consolidated revenue of Rs
3,315.6 crore, registering a 27.2% growth over the previous year's revenues,
which were Rs 2,612.9 crore. The net profit for the same period was up 16.8%
amounting to Rs 646.3 crore, as compared to Rs 553.6 crore in the previous
financial year.

During the year under review, the company signed three large multi-year,
multi-services; transformational deals each in excess of $50 mn. The company
signed a business transformational deal with a large global bank to help them in
the process of application consolidation and application performance
optimization to drive higher performance at lower operational costs across their
IT infrastructure. 

HCL has also entered into a joint venture with NEC of Japan, a leading
provider of Internet, broadband network, and enterprise business solution to
form a new company 'NEC HCL System Technologies', with a base capital of
$5 mn.

For the third quarter ended March 2006, HCL Tech's consolidated revenues
grew 7.4% sequentially, amounting to Rs 1,122 crore, as compared to Rs 1,054.2
crore in the previous quarter. Revenues were up 30.7% y-o-y, amounting to Rs
858.2 crore in the same quarter last year. Net profit for the same period stood
at Rs 192.2 crore, up 6.5% sequentially.

Revenues form the US and Europe amounted to Rs 665.3 crore and Rs 288.3 crore,
growing 37% and 30% respectively, whereas revenues from Asia Pacific stood at Rs
168.3 crore, up 17% on an annualized basis. The number of million dollar clients
increased from 131 in the third quarter of FY 2006 from 126 in the similar
quarter of FY 2005. The company's manpower strength stood at 29,948, up from
28,182, with the net addition of 1,766 persons.

During the quarter, the IT service contributed 74% of total revenue, 14% and
12% contribution came from BPO and Infrastructure. During the quarter, the
company signed a long-term contract with European retail company, DSG
International Plc for multiple services. The company claims that this is one of
the largest single order for an Indian IT services company. While, HCL Tech has
been showing consistent growth in sales and profits as well as entering new
large accounts, its margins have been declining and this is likely to continue
for some time.

HCL Tech is trading at Rs 412, discounting its projected June 2006 EPS by 14
times and June 2007 EPS by 12 times. The stock has been volatile compared to its
peers as there were concerns about revenue growth. The falling margins, however,
remain a cause of worry among investors and may dampen investor sentiment. We
retain our rating on the stock. Market performer.

Sushanto Mitra

The author is the founder of Technology Capital Partners

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