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HCL TECHNOLOGIES: Thrust on Emerging SW Areas

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DQI Bureau
New Update

The IT boom has inspired a number of companies to set up

operations in the country. These would then be leveraged to address global

markets. Despite an all-round success of this business model, only a few have

realized the need to plan and a majority operates primarily on tactics for

market penetration and skill development. Increasingly, focus and skills in

leading-edge technologies will determine whether these companies would succeed.

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Fact Sheet

HCL Technologies



A 10-11, Sector 3


Noida 201301


Tel: 118 4520917


Fax: 118 4530591


www.hcltechnologies.com  


Listing (Stock Exchanges): Bombay Stock Exchange, National Stock Exchange, 


Delhi Stock Exchange


BSE Code: 32281


NSE Code: HCLTECH







HCL Technologies is focused on new and advanced technologies.

The company’s substantial investment towards creating expertise in emerging

technologies has enabled it to earn one of the highest per employee revenue in

the industry. HCL Tech is currently traded at Rs 1,248 with a 52-week high of Rs

3,021 and low of Rs 857.

Early start

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HCL Tech was formed in November 1991 as HCL Overseas. In July

1994, the company changed its name to HCL Consulting and then to HCL Tech. Part

of the HCL group, it started its business by addressing the onsite market

through HCL Technologies America. HCL Technologies America was acquired by HCL

in 1995. It then took over the assets and employees of the R&D division of

its group company, HCL Infosystems, in 1996. The company acquired a 60% stake in

the US-based Intellicent and enhanced its stake in Intellicent to 100% in 1999.

HCL Tech tapped the stock market in November 1999 with an issue of 14.2 lakh

shares of Rs 4 each at a premium of Rs 576 per share. The issue raised about Rs

825 crore to finance the company’s expansion plans. The company today has a

strong international presence with 18 subsidiaries spread in around the globe.

Presently, it has 12 software development centers and 21 offshore development

centers for its clients.

HCL was promoted by Shiv Nadar. Nadar is also the founder of

HCL Infosystems and NIIT, both listed on the major stock exchanges in India.

However, Nadar has stepped down from the boards of HCL Infosystems and NIIT, and

is currently only on the board of HCL Tech. HCL closed the fiscal ended June

2000 with consolidated revenues of Rs 925.6 crore and net profit of Rs 233.2

crore, respectively.

Integrated player

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HCL Tech provides services in the area of embedded products,

product development, Internet, e-commerce, software services and networking. The

company currently has 30 offices in 15 countries. The company and its

subsidiaries earned revenues of Rs 926 crore in the fiscal ended June 2000.

Under the technology development services, the company

provides solutions to embedded software product companies. HCL Tech earned 34%

of the total consolidated revenues from these services.

Akin to technology development services is the software

product engineering services where the company assists software product

companies in providing similar services. The services are provided in the area

of Internet and client-server technologies to its clients such as NTT Data,

Infinium and Sherpa. Product engineering services formed 18% of the total

consolidated revenues in the period ended June 2000. HCL earned 32% of the

consolidated revenues in June 2000 from its application engineering services

division.

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Networking is another focus area of the company where it

provides consultancy, planning, and integration and migration services. It has

made strong inroads into the telecom segment. HCL Tech provides these services

using three technologies: satellite communication, wireless communication, and

networking and internetworking. Revenues from networking stood at 16% of the

consolidated revenues. HCL Tech also works closely with companies providing

services on the Net.

Among its four service divisions, 41% of the consolidated

revenues were from services relating to the Internet and e-commerce. This was

144% higher than in 1999, at Rs 131.7 crore. Similarly, revenues from technology

development services stood at Rs 103.1 crore, up 161% over the corresponding

previous year.

HCL Tech’s consolidated revenues were Rs 925.6 crore in the

full fiscal year ended June 2000–28% higher than in 1999. Revenues from the US

stood at 71%, whereas the share of Asia-Pacific and Europe stood at 22% and 7%,

respectively. One of the major reasons for the lower growth in revenues was the

shift from onsite to offshore projects. The company’s offshore revenues went

up from 49% to 63% in fiscal ended June 2000. The billing rates for offshore

activities are lower than for onsite ones, while margins were better. The

company has set up excellent infrastructure in the country spread across 12

development centers covering an area of 430,000 Sq ft. These centers are based

in Noida, Gurgaon, Ambattur and Chennai, and are linked with communication

facilities with its global offices.

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HCL Tech’s overall employee strength, including that of its

subsidiaries stood at 4,195, at the end of September 2000, out of which 83% were

based in India. The company follows an aggressive recruitment policy and

provides extensive training to its employees in the emerging technologies.

Almost 91% of the employees are covered under the ESOP plan.

The company is currently providing services to 286 clients

spread across the globe. The company has 30 sales and marketing offices in these

countries that provide round-the-clock services to its clients.

Apart from its own software development centers, the company

has also set up 21 offshore development centers for clients such as Lexis Nexis,

EJS, BT Portfolio Services, RSA Security, EXE Technologies, Syntra,

priceline.com and KLA Tencor. HCL has also earmarked substantial for investment

in potential technology companies. HCL has invested in technology-focused funds,

which invests and incubates companies operating in new technology areas. The

company’s strategy is to invest in emerging companies along with the funds and

be a part of their growth. HCL has invested $13 million in the funds and

directly in the emerging companies.

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Future: Focus on technology

HCL Tech’s excellent performance has been a result of its

focus on high-end technologies, translating these into billing rates better than

its competitors. The company’s revenue per employee stood at Rs 31 lakh

compared to Rs 19 lakh of Infosys and Rs 15 lakh of Satyam. HCL Tech’s

strategy to focus on clients engaged in providing solutions in new and high-end

technologies has paid off, which is evident from its realization. HCL intends to

strengthen its association with such clients by giving a stake in its equity

against confirmed revenues. This strategy will ensure the company’s

involvement in the projects for a longer period of time, which will improve its

skill-sets in core technologies. Moreover, the equity option will increase the

commitment from the clients, ensuring consistent and predictable growth

in revenues. The company plans to issue equity to 12 clients, with revenue

commitment of $380 million in the next five years.

HCL’s focus area is the highly remunerative TDS and going

ahead, technology and application development services will be the key driving

factors whereas networking services is expected to consolidate in line with the

growth in the telecom sector. Apart from ensuring long-term relationships

through alliances with clients and issuance of equity to them, the company also

plans to grow inorganically by acquiring companies. The company has formed a

team to scout for companies with good expertise in technology and sound client

base in the US and Europe. HCL Tech has received an approval for $500-million

ADR issue, which will be utilized for acquisitions.

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Financials

(All figures in Rs crore)

 

1999

2000

2001*

2002*

Sales

724.5

925.6

1,496.9

2,469.9

Other Income @

25.8

81.7

92.5

87.1

Operating Profit

120.5

261.3

500.9

862.0

OPM (%)

16.6

28.2

29.8

33.1

Net Profit

95.3

233.5

450.2

765.5

Equity Capital#

33.2

55.9

55.9

55.9

EPS (Rs.)

11.5

16.7

32.2

54.8

* Projected

Year ended March 31

@Other income includes share of

income from equity investment 
# Face Value = Rs 4 per share
Note: Financials are on

consolidated basis since the company's revenues on standalone basis are

only 43% of the consolidated revenues.

Apart from its focus on technologies, the company’s

de-risking model ensures lower dependence on few clients. In the first quarter

of the current fiscal, the company achieved 23% of revenues from top five

clients and 35% of revenues from top 10 clients. While this will reduce the risk

of concentrating revenues on few clients, the company’s investment in offshore

infrastructure would improve the operating margins in the coming years.

Good bottom line

Despite slower growth in the revenues, HCL Tech has been able

to report excellent bottomline growth thanks to improving billing and offshore

rates. With focus on providing high-end technology services, HCL has been able

to command one of the highest billing rates among the top IT companies in India.

The performance of HCL ,on a standalone basis, was good with 45% growth in

revenues, which touched Rs 396 crore and 97% jump in net profit at Rs 199 crore.

The company reported operating margins of 43% during the period. However, the

OPM on a consolidated basis stood at 23% in June 2000, which were due to higher

selling and administration costs. Notably, the OPM has improved from 15% in the

previous year. The first quarter consolidated revenues for the period ended

September 2000 stood at Rs 318 crore, which were 64% higher than the

corresponding quarter previous year. Net profit in the same period jumped 164%

from Rs 36 crore to Rs 96 crore.

Investment potential: Attractive

HCL is currently traded at Rs 1,248 discounting its projected

June 2001 consolidated earnings by 39 times and June 2002 earnings by 23 times.

The earnings will get diluted as the company issues shares to its clients. HCL’s

share price touched a high of Rs 3,021 during February 2000 and has since

declined to the current levels. The focus of HCL tech on high-end technology

creation would lead to higher premium in the valuations as one goes ahead. While

we believe that the group factor may continue to have some negative impact on

the multiple, the valuation of the company will change in line with the

performance. The company’s niche operations and focused strategy on

investments in new technologies are certain to bear fruits in the longer run.

Buy.

Sushanto Mitra 



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.

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