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HCL Tech: Reading between numbers - Views on News from Equitymaster
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  • May 29, 2002

    HCL Tech: Reading between numbers

    Infosys’ practice of telling all to its shareholders has created a race amongst its peers to disclose more and more. Post the quarter-ended December it was Satyam that started dramatically improving the level of disclosure. The latest to join the list is HCL Technologies, which has joined the list of ‘bare all’ from quarter ended March.

    Previously only HCL Tech consolidated numbers and HCL Tech Ltd. numbers were available. With HCL Tech contributing only 42% to the consolidated revenues, the shareholders were in the dark about the significant part of the consolidated entity’s operations on quarterly basis. However, all that has changed.

    According to the detailed disclosure by the company, the organic group consists of HCL Technologies, E-Serve Technologies and HCL Comnet. The inorganic group consists of Deustsche Software, HCL Enterprise Solutions and HCL Technologies NI. While the organic group contributed 87% to the total revenues, the contribution from the inorganic group was 13%.

    Almost all the group companies showed strong sequential growth in 3QFY02. E-Serve, HCL Tech’s subsidiary in the ITES services areas, saw revenues growing by 116% from Rs 6 m in 2QFY02 to 13 m in 3QFY02. The consistent strong growth in revenues for E-Serve could cause markets to sit up and take notice.

    Revenues as a % of consolidated revenues
      2QFY02 3QFY02 QoQ growth
    HCL Technologies 76.6% 72.1% -4.0%
    HCL Comnet 11.9% 14.2% 21.4%
    E-Serve 0.1% 0.3% 116.7%
    Total organic 88.6% 86.6% -0.4%
    Deutsche Software 6.1% 6.2% 3.7%
    HCL Enterprise solutions 4.2% 3.6% -13.6%
    HCL Technologies NI 1.1% 3.7% 226.1%
    Total inorganic 11.4% 13.4% 19.7%
    Total consolidated 100.0% 100.0% 1.9%

    HCL Technologies NI also saw significant growth in topline. The growth was 226% sequentially and at much higher revenue base compared to E-Serve. Only HCL Technologies and HCL Enterprise solutions business saw a decline in revenues. On a consolidated basis, HCL Technologies posted a 2% growth in revenues. Thus, the 4% decline in the topline of HCL Technologies (76% of consolidated revenues) has been offset by revenue growth from other business segments. Consequently, the revenues grew by 2% on a consolidated basis.

    What the detailed numbers tell us is that HCL Technologies saw a significant 8% sequential growth in net profits for 3QFY02, inspite of a 4% QoQ decline in topline. This primarily came from improved operating margins and a significant growth in other income. However, decline in operating margins from other companies and the losses from E-Serve and HCL Technologies NI caused the margins to decline on a consolidated basis. It was the significant growth in other income that came to the rescue. Consequently, the consolidated bottomline growth outpaced the topline growth to grow by 5%.

    Operating profits
      2QFY02 3QFY02
    HCL Technologies 29.4% 30.8%
    HCL Comnet 15.5% 8.6%
    E-Serve -266.7% -115.4%
    Total organic 27.1% 26.7%
    Deutsche Software 28.4% 27.4%
    HCL Enterprise solutions 17.2% 13.7%
    HCL Technologies NI 10.9% 7.3%
    Total inorganic 22.5% 18.2%
    Total consolidated 26.5% 25.5%

    The margins for HCL Comnet, HCL Enterprise Systems and HCL Technologies NI are a cause for concern as they are much below that of HCL Technologies. However, this could be offset by the rapid growth in the revenues of E-Serve that can cause the overall margins to improve swiftly going forward. However, the most significant aspect of the performance is that HCL Technologies managed to improve operating margins significantly despite a decline in revenues. This speaks of the company’s ability to control costs.

    The company on a consolidated basis derives almost all of its profits from HCL Technologies. Thus, in the near future its bottomline is unlikely to show significant growth rates. Also, considering the fact that a large part of the profit growth for HCL Technologies in 3QFY02 came from controlling costs, bottomline growth in subsequent quarters looks tough as the business environment continues to remain weak.

    Net profits as a % of consolidated net profits
      2QFY02 3QFY02 QoQ growth
    HCL Technologies 95.4% 98.3% 8.0%
    HCL Comnet 4.3% 1.7% -57.4%
    E-Serve -1.6% -1.6% 5.0%
    Total organic 98.1% 98.5% 5.2%
    Deutsche Software 2.2% 2.2% 3.6%
    HCL Enterprise solutions 0.2% 0.6% 166.7%
    HCL Technologies NI -0.6% -1.3% 142.9%
    Total inorganic 1.9% 1.5% -16.7%
    Total consolidated 100.0% 100.0% 4.8%

    It will be quite sometime before other companies from the group make a significant contribution to the bottomline. However, with two very profitable companies - HCL Technologies and Deutsche Software, and E-Serve seems all set to cash in on the ITES boom, the prospects are likely to improve gradually going forward. At the current market price of Rs 220, the stock is trading at a P/E multiple of 12x its 3QFY02 annualised earnings. The valuations seem to be attractive considering a significant holding period. Also, an economic recovery in the US could add pace to the topline and bottomline growth, causing valuation to move further north.



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