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HCL Technologies: Embedded growth

Jan 2, 2001

A brief recap: HCL Tech is organised into four groups, the technology development group, application engineering services, software engineering services and networking services. The technology development group is into developing solutions for embedded systems. As the name suggests the embedded software is integrated into hardware so that the devices become live i.e. the devices can communicate with other devices, or take some decisions. The opportunity in this area is tremendous. One of the technologies everybody is talking of today is Bluetooth. Using Bluetooth will enable devices to communicate with each other. The future is that people will have their own private networks of desktops, laptops, PDAs and TVs. All these devices will be able to communicate with each other and exchange data.

The growth potential is tremendous for the simple reason that for the end user embedded technologies and applications would mean a lot of convenience. The concept for the future is a networked home wherein not only all the electronic consumer devices are networked with each other but they are also connected to the Internet. Therefore, sitting thousands of miles away one could monitor if the refrigerator is working properly – online diagnostics.

Technology Development, Networking Services and Software Product Development services contributed 68% of the revenues in FY00. The other high technology areas that HCL tech is into include digital signal processing, WAP (wireless application protocol), network processors, Gigabit Ethernet and ATM (asynchronous transfer mode) technologies.

One of the most positive factors is the company’s commitment to technology. It has created technology “cradles” that identify and foster emerging technology. About 9% of the company’s manpower is focused on diverse technology cradles in the areas of Blue tooth, WAP, and xml (extended mark up language).

  HCL Tech Infosys Wipro Hughes
P/E (x) 38 66 106 58

If we compare HCL to other software companies that have interest in technology it’s valuation is quite low. One of the reasons could be its low revenue growth rate of 28% in FY00. This growth rate could go up due to burgeoning need for embedded and telecommunications software. Also the other growth driver will be its income from investments into other companies. The other income figure was Rs 538 m (up 505 %) in FY00.

The business model of the company differs from other software companies. The company intends to grow its bottomline through inorganic growth. For the purpose, the company has evolved a 'Technology Market Acquisition Strategy' to forge strategic partnerships with select technology funds .In FY00 the company has invested Rs 394 m (17% of its cash profits) in five technology funds having a combined corpus of $1-$1.5 bn. The revenues from these investments will start reflecting in its bottomline only after 1-2 years.

For 1QFY01 its operating margin was 29%, which is comparable with the best in the industry. Its technology focus will give it the edge that will ensure its growth and profitability.

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