HCL TECHNOLOGIES LIMITED: Emerging Dynamo

As the dust settles on the US elections and the fears of outsourcing backlash
recede, Indian software companies are now looking a lot more comfortable than
they did a few months ago. This improving environment gives an opportunity for
companies to enter new markets and add new services. Among the companies that
have been working hard in the last couple of years to diversify their services
portfolios is Noida-based HCL Technologies, now well set to becoming a well
diversified software services company and likely to perform better than many of
its peers in the forthcoming quarters.

HCL Technologies is a leading player in the Indian software services industry
providing services in the area of embedded products, product development,
Internet, e-commerce and networking arenas. The company provides services to
industry verticals like automotive, BFSI, aerospace, insurance, networking, life
sciences, retail, telecom, transportation, utilities, travel and semiconductor
manufacturing. HCL Tech's current equity stands at Rs 59 crore with promoters
holding 76%, institutional investors holding 17%, the Indian public holding 3%
and others holding the balance 4% of the stake.

The company reported healthy annual results for the financial year ended June
2004. HCL Tech earned revenues of Rs 2,614 crore, registering a 35% growth over
the previous year's revenues, which were Rs 1,931 crore. The net profit for
the same period was up 192% amounting to Rs 792 crore as compared to Rs 271
crore last year.

HCL reported modest performance for the first quarter of the new financial
year ended September 2004. On a sequential basis, total group revenues were up
6% to Rs 782 crore whereas the net profit was down 23% to Rs 162 crore. Compared
to the corresponding quarter in the previous year, the revenues were up by 39%
and the net profit grew by 70%.

Revenues form the application services provided emerged the key contributor
of the revenue growth, contributing 39% of the quarterly revenues amounting to
Rs 305 crore, growing 9% sequentially. The company's technology development
services unit contributed 24% of the total revenues during the quarter,
amounting to Rs 191 crore as compared to Rs 180 crore sequentially, registering
a 6% growth. The software product engineering services made a 16.7% contribution
to the total quarterly revenues, up 7% q-o-q amounting to Rs 130.6 crore in
contrast to the revenues from the infrastructure services provided, where
revenues declined 13% sequentially to Rs 61 crore contributing 7.8%. The BPO
services division witnessed a 10% increase on a sequential basis where revenues
stood at Rs 94.7 crore, contributing the balance 12.1 % of the revenues for the
quarter ended September 2004. Revenues from offshore activities continued to
contribute 80% of the total quarterly revenues, amounting to Rs 625.8 crore
whereas revenues from onsite activities contributed the balance 20% amounting to
Rs 156.4 crore.

HCL Tech added 16 clients during the quarter. The company's manpower
strength stood at 18,474, up 2,116 over the previous quarter. The strong growth
in manpower and improving outsourcing environment would enable HCL Tech to show
continued strong performance in the upcoming quarters. While the first quarter
results of FY 2004-05 were not all that inspiring, we believe that subsequent
quarters will be a lot better.

HCL Tech is trading at Rs 364 discounting its projected June 2005 EPS by 15
times and June 2006 EPS by 12 times. With its BPO fortunes improving, and
infrastructure services riding on a positive environment, the comapany should
find it easy to stay on an accelerated revenue growth path. Outperformer.

Sushanto Mitra The
author is the founder of Technology Capital Partners

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