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HCL Tech: Value added growth

Apr 19, 2001

HCL Tech posted a sequential (QoQ) growth of 6% in revenues (consolidated numbers). The rise in net income is just 2.7%. On a YoY basis the growth in the topline is 53% while the rise in net profit is 96%. The company has beaten market expectations with the financials it has posted. For the 3QFY01, 77% of the revenues were from the high value added services that include technology development services, software product engineering and networking services. The figure was same for 2QFY01. Almost all major software companies have taken a hit in their revenues from new technologies like e-commerce while HCL has not only held its ground but also posted a sequential 6% increase in revenues. This is an indication of the company’s quality of service and the reputation it enjoys with its clients.

(Rs m) 2QFY01 3QFY01 Change
Sales 3,423 3,632 6.1%
Other Income 410 351 -14.4%
Expenditure 2,409 2,510 4.2%
Operating Profit (EBDIT) 1,014 1,122 10.7%
Operating Profit Margin (%) 29.6% 30.9%  
Interest - -  
Depreciation 98 110 12.2%
Profit before Tax 1,326 1,363 2.8%
Other Adjustments - -  
Tax 86 89 3.5%
Profit after Tax/(Loss) 1,240 1,274 2.7%
Net profit margin (%) 36.2% 35.1%  
Diluted number of shares (m) 282.0 282.0  
Diluted Earnings per share* 17.6 18.1  
*(annualised)      
P/E (x)   20  

HCL has Infact revised (upwards for a change) its FY01 revenue estimates to Rs 4.8 bn. Compared to FY00 figure of Rs 2.4 bn this translates into a growth of 97%.

The company has added 28 clients for the quarter of which 6 are from the Fortune 500. These include ANZ Bank, EMC, Novell, Semy, Dairy Farm and NTT Data Corporation. The contribution of offshore development to the revenues has shot up to 65% compared to 63% in the 2QFY01. The pressure in billing rates, if any, will be compensated by the higher operating margins that the company enjoys due to increased contribution from offshore development to the revenues. The client concentration was 22% for top 5, 33% for top10 and 44% for top 20. The total number of the clients now stands at 332. This is one of the largest customer lists any software company has. During the quarter the company has set up ODCs (offshore development centres) for 5 new clients and signed 16 new offshore contracts.

According to HCL Tech, the slowdown in the US economic has so far had a positive impact for the company as more clients have pushed work offshore and the onsite to offshore ratio has changed to 35: 65 in favour of offshore. HCL expects the offshore business to increase to 70% by the end of FY01.

In the meanwhile the company continues to sharpen its edge by developing new solutions like operating system for storage solutions, high-speed processors for networking industry, development of routing engine and wireless application development.

HCL was expected to be impacted significantly by the slowdown, as most of its interests are in the emerging technology areas. But its defiant performance has proved the company’s mettle. Based on the current quarter’s results, we expect the company to continue a similar performance in the future.

At a market price of Rs 355 the stock is trading at a P/E multiple of 20 times its 3QFY01 annualised earnings.

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