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HCL Tech: Airís the focus - Views on News from Equitymaster
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HCL Tech: Airís the focus
Jun 22, 2007

As per recent reports, Indiaís fifth largest software services exporter, HCL Tech has expanded its relationship with Rockwell Collins to deliver high value services in software and hardware development as well as mechanical engineering for product life-cycle development. We look at how this deal will give HCL Tech and edge in the hi-tech sector over others. About HCL Tech
HCL Technologies is the fifth-largest software services exporter from the country and is focused on research and development (R&D) outsourcing. Its service offerings include enterprise application services (13% of revenues), engineering and R&D services (23%), industry solutions (36%), infrastructure services (14%) and BPO services (14%). While the company has witnessed stable growth in its core business, it has done well to grow its inorganic businesses in the past few quarters. HCL Techís focus on Engineering and R&D outsourcing and its experience in technology development services gives it a competitive edge over its peers. The companyís strategy to move up the value chain and improving operational efficiencies is paying off as well.

About Rockwell Collins
Rockwell Collins was founded as Collins Radio in 1933. During the next three decades, Collins continued to expand its work in all phases of the communications field while broadening its technology thrust into numerous other disciplines. The company further strengthened the focus on aviation electronics in 1998. Today, Rockwell Collins designs, produces, markets and supports electronic communications, avionics and in-flight entertainment systems for commercial, military and government customers worldwide.

HCL Techís relationship with Rockwell Collins
HCL Tech's relationship with Rockwell Collins began six years ago with a verification and validation project and has grown substantially in size and strategic relevance since its inception. It was also one of the first aerospace companies to look to India as a strategic sourcing destination.

Why is HCL focusing on aerospace outsourcing?
The aerospace outsourcing market is throwing up opportunities very fast and HCL Tech is aiming to increase its revenues from the aerospace technology outsourcing market. To achieve this, the company also showed its work for customers, including Boeing, at a recent airshow in the UK. Currently, 18% of HCL Techís hi-tech and manufacturing revenue is derived from the aerospace industry. However, given the exciting growth of the Indian aerospace market, and the growing interest in aerospace development offshoring, the company anticipates this to figure to reach around 30% in five years time.

As per the NASSCOM estimates, the size of the aerospace technology outsourcing market in India is currently about US$ 150 m and would touch US$ 1 bn in 4 years time. HCL has established a design centre for an aerospace Tier-1 company, which will have more than 150 engineers and the company, has also developed a set of core avionics skills that enable offshoring of complete subsystems.

Whatís in the deal for the company?
The current services offered by HCL Techís aerospace division includes embedded software, hardware design, engineering services, test equipments and rigs and applications development. The companyís aerospace business currently includes several global aerospace companies as its client including airframe manufacturers, system integrators and tier 1 suppliers.

Under the terms of the new renewable agreement, HCL Tech will serve as an extension of Rockwell Collins engineering centers, delivering high value services such as software, hardware and mechanical engineering for full product lifecycle development and about 300 engineers and experts will be dedicated for Rockwell Collins' offshore design and development centres in Chennai and Bangalore.

This strategic relationship will further consolidate the companyís leadership in the aerospace engineering arena along with the recently concluded US$ 15 m (Rs 610 m) contract with Alenia Aeronautica of Italy to provide engineering services in the aerospace market. Aerospace outsourcing is one of the fastest growing markets and the company has done well to make early inroads in this sector than its major counterparts.

At the current price of Rs 335, the stock is trading at a multiple of 14.1 times our estimated FY09 earnings, which makes it fairly valued. While the company has been leading the Indian technology pack when it comes to offshoring of high-end technology services, the fact that the benefits have not been really seen in its performance on a sustainable basis is what concerns us the most. The stock is not one of our top choices from the software sector.

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