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Where emerging technologies is the buzzword - Views on News from Equitymaster
 
 
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  • May 12, 2001

    Where emerging technologies is the buzzword

    Every industry has a story to tell. The software industry in India is the story of middle class Indians, who broke free from the shackles of "babudom". Working hard on the only wealth they had i.e. knowledge, they have successfully managed to create world-class organisations. Organisations that have broken all myths and have established that the true wealth of a nation are its people, their entrepreneurial spirit and knowledge.

    For one such company the story began in the fall of 1975 when six engineers led by Mr. Shiv Nadar collectively created a computer systems and services company called “Hindustan Computers Limited” (HCL). The company from a small office in the suburbs of New Delhi has grown into the HCL Technologies (HCL Tech) today, a formidable player in the Indian software industry.

      2QFY01 3QFY01
    Technology development services 44% 47%
    Software engineering & Networking services 33% 30%
    Application engineering 23% 23%

    HCL Tech, today, is organised into four groups: the technology development group, application engineering services, software engineering services and networking services. The company right from the beginning and during the course of its evolution was always inclined towards systems related software. HCL Tech has always emphasised on the importance of building skills in emerging technologies by focusing on research and development. The company’s R&D expertise stems partly from the years of experience it has in the area. This is due to the fact that many of its early efforts in research and development related to the design of computer hardware and systems software products for the Indian market right from the 1980s.

    The technology development group is now focused on developing solutions for embedded systems. The advantage of working in the high-end technology area is that the entry barrier is high and not many companies enter the domain. This proves to be the competitive edge for HCL Technologies. Due to this the company can command higher billing rates.

    (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) at Rs 412   23  

    The software engineering services of the company consists of software services to end-users in IT consulting, application development, re-engineering, Euro conversions, and global implementation and rollout support. Similar services are offered to software companies under application engineering services.

    HCL Technologies provides networking services to large corporates. Increasingly as information becomes more and more critical to an organisations day to day activities the networking infrastructures have to be state of the art and reliable. With the ever-growing need for faster and cheaper networks the network infrastructure changes over time because of new technology. HCL Technologies has the competitive edge in this market as it delivers the entire gamut of IT life cycle services.

    In third quarter of fiscal year 2001, 47 percent of its revenues came from technology development services (up from 34 percent in fiscal year 2000). Infact the contribution of high value added services (technology development services, software engineering services and networking services) is 77 percent of the revenues. Application development accounts for only 23 percent of revenues. This figure has come down from a sizeable 32 percent in FY00. Due the significant contribution of high value added services to its business portfolio HCL Technologies has one of the best operating margins in the Indian software industry.

    The company’s operating margins on a consolidated basis come to around 31 percent (excl other income). However, since HCL has a unique business model wherein it hopes to earn a sizeable portion of its income from subsidiaries, which are, recognized in its income statements as other income. Therefore, considering the other income figure the company’s operating margins are about 40 percent. The operating margins for HCL Technologies alone are 53 percent, one of the best in the industry.

    For first nine months for fiscal 2001 the company has clocked Rs 10,232 million (US$ 220 million) in revenues. This translates to a growth of 10 percent compared to revenues of Rs 9,256 million (US $ 199 million) in fiscal year 2000. If the company’s topline does not grow sequentially and the revenues are same as they were for the third quarter of fiscal 2001 the company would clock a growth of 50 percent in fiscal 2001. This is above the industry average of 40-45 percent as predicted by Nasscom.

    No doubt HCL Technologies competitive edge lies in its expertise in the systems software. What is interesting to note that it has not missed the opportunity enterprise application domain. It has managed to make the most out of both the areas.

    But what is going to keep it ahead in the increase competitive scenario is its strong R&D focus. So strong that in an environment where companies after companies are giving profit warnings, HCL has revised its expected net income figure – upwards.

     

     

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