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HCL Technologies – Looking good

Sep 11, 2000

HCL Technologies Ltd. is one of those software companies, which are in the upper chain of the value services. It is a global technology and software services company offering a suite of services targeted at technology vendors, software product companies and medium to large end user organizations. HCL's business is technology driven and is characterized by increasing reliance on Internet & e-commerce solutions and customer alliances/partnerships. Its business can be explained as under:

Technology Development Services: - These are services provided to embedded software companies, which focus on software components that are either embedded into or integral to the functioning of hardware products. It also includes new product development, redevelopment / reengineering of old products and maintenance support that is intrinsic to sustaining products that have a large and diversified installed base. Technology development services formed 34% of its total revenues in FY00.

Application Engineering Services: - These are services provided to application software product companies. They are based on the company's skills in applications, Internet and client/server technologies. These services include the design and development of new application software products as well as re-development / re-engineering and maintenance of existing products. It accounted for 32% of HCL’s revenues in FY00.

Software Engineering Services: - These are project-oriented services that focus on end-users in large and medium business and government organizations. These include IT consulting, end-user application development and re-development, and global implementation & rollout support.

Networking Services: - HCL's networking services are provided to large end user organizations, those requiring a complete range of IT life cycle services of their networks. HCL has a rich experience and capabilities in adopting a multi-technology approach. Services are provided over three distinguished technologies viz. satellite communication, wireless communication and networking and internetworking. Networking services typically include consultancy and planning services, integration and migration services and operations and diagnostic services.

The following table shows that HCL is almost on par with the company like Infosys, which is considered as the benchmark for Indian IT industry. The company has de-risked its business model and is operating on the higher value chain.

Comparative revenue mix
HCL Technologies (%) Infosys Technologies (%)
Particulars FY99 FY00 Particulars FY99 FY00
Internet and E-Commerce 27 41 Internet 4 14
Technology Development 20 34 Distributed Systems 42 47
Networking Services 11 16 Mainframe 37 25
Other Traditional Services 42 9 Others 18 14

At the current market price of Rs 1,338 HCL Tech trades at a P/E of 91 times its FY00 earnings. Its peers with similar size and performance parameters trade at the higher valuation. HCL’s revenue growth in future is likely to be driven by Internet related services, which would also drive valuations in the future.

Comparative valuations
Particulars HCL Tech Infosys
Market Price (Rs) 1,338 8,765
P/E (x) 91 119

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Dec 1, 2021 (Close)


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