Third Ace From HCL Stables

Projects:
Expanding horizons

HCL is now coming out with a public issue to finance its expansion
plans. It plans to raise approximately Rs824 crore from the book
building and public issue. The company plans to utilize the funds
for the ongoing capital expansion, purchase of property, working
capital requirement and investments in acquisitions or alliances.
HCL has bagged contracts worth Rs750 crore from US-based GTECH and
KLA Tencor. It has decided to offer shares to these two companies
as well. The company recently bagged a major contract worth Rs750
crore.

Financial
performance: Impressive

HCL’s revenue has jumped remarkably in the past four years, growing
at a CAGR of 212%. The net profit in the same period has increased
by 175%. The company reported ‘excellent’ performance in the year
ended June 1999 with revenues increasing from Rs124.24 crore to
Rs275.73 crore. The net profit in the same period has jumped 82%
to Rs100.97 crore. The company’s operating profit margin declined
from 46.59% in June 1998 to 38.39% in June 1999. On the other hand,
the company’s ROCE improved from 42.72% in June 1998 to 57.63% in
June 1999.

HCL has projected
a turnover of Rs390.01 crore and a net profit of Rs170.24 crore
for the year ending June 2000. These are based on the current orders,
booked and ongoing projects.

The company’s
equity as on June 1999 stood at Rs33.19 crore, which increased to
Rs49.79 crore on the issue of bonus shares in the ratio 1:2 in October
1999. The equity capital will increase to Rs55.47 crore after the
current issue. Post issue, the promoters’ stake will fall from 82%
to 74%.

HCL has not
taken into consideration income from interest earned from the deployment
of funds it will generate through oversubscription of the current
issue.

Investment
potential: Value for money

HCL is offering its shares through book building in the price range
of Rs500-580. Under the book building process, investors can apply
for a minimum of 100 shares of the company at any price within the
range announced by the company. This will be followed by a public
issue at a price expected to be Rs580, though this will be determined
by the success of the book building. The offer price of Rs580 discounts
by 47 times the projected June 2000 EPS. The success of the book
building issue by Hughes Software, which was oversubscribed by a
massive 60 times, augurs well for HCL. The shares of Hughes Software,
which were offered at Rs630 were listed at a whopping Rs1,600, giving
a return of more than 150% to the share holders. Hughes had offered
the shares at a P/E of 50 to the prospective March 2000 EPS.

Currently, the
valuation of software stocks is sky high, thanks to the consistent
growth over the past two years. Major software companies such as
Infosys Technologies, Mastek and Satyam Computer Services are traded
at a P/E multiple of more than 100 times its prospective earnings
for 2000. However, the group companies of HCL-NIIT and HCL Insys-are
traded at a lower P/E. Considering HCL is offering its shares at
a P/E of 47 and the recent success of Hughes Software, investors
can expect considerable appreciation on the offer price of Rs580.

Leave a Reply

Your email address will not be published. Required fields are marked *