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HCL Tech: Strengthening service offerings

Sep 27, 2001

HCL Technologies has picked up a 51% stake in Deutsche Software Ltd., the IT services subsidiary of Deutsche Bank in India. HCL Tech will acquire the remaining 49% at the end of 3 years through the issuance of HCL Tech's equity shares to Deutsche Bank. Currently, the valuations for the deal are not available. This move strengthens HCL Tech’s presence in the financial services vertical, one of the major revenue earners for the software sector. The BFSI (Banking, Financial services and Insurance) vertical contributed to 37% of Infosys revenues in 1QFY02 and clocked a sequential growth of 20%. According to Gartner, in FY99 19% of the Global IT spends came from this vertical. HCL Tech traditionally has been more into systems related software and will now consolidate in this domain that has attracted a large number of software companies.

Deutsche software was established in 1992 to provide solutions in banking and finance to Deutsche Bank. The company has more than 450 professionals and revenues exceeding 20 million-DM for the year ended December 1999. Assuming a very optimistic growth rate of 100% for the next two years, the revenues for the year ended December 2001 should be in the range of Rs 1,805 m. If the company has a PAT of around 30% and has a payout ratio of 100%, the dividend for HCL Tech (for 51% stake) is expected to be around Rs 249 m. This works out to be an additional EPS of Rs 0.87. In FY01 HCL Tech’s EPS stood at Rs 17.

Particulars FY01
Revenues (DM m) 80.0
Growth (assumed compared to FY00) 1.0
Revenues (Rs m) 1,804.8
NPM (assumed) 30.0%
PAT (Rs m) 541.4
Payout (assumed 100%, Rs m) 541.4
Dividend tax 54.1
HCL's stake 51.0%
Dividend income (Rs m) 248.5
No of shares (m) 284.9
Additional EPS (Rs) 0.9

As per the terms of the agreement, Deutsche Software will have a right of first refusal for seven years on business that is to be sourced by Deutsche Bank from India, thus giving the company a reasonable visibility in revenues for the next seven years. With over Euro 967 bn (Rs 42,674 bn) in assets (as of December 31, 2000) Deutsche Bank is one of the leading international financial service providers. With more than 98,000 employees, the bank serves more than 12 million customers in more than 70 countries worldwide. Its interests are in asset management, capital markets, corporate finance, custody, cash management and private banking. Given such a background, it is only natural to assume that business from Deutsche Bank would continue to flow in incrementally. The only grey area in this deal is at what billing rates HCL Tech would do projects for Deutsche Bank. There are no details available on this at present.

The markets seem to have given thumbs down to the move as a first reaction. One of the concerns could be the company’s shifting focus from technology. But considering the nature of the software services industry, the move would definitely help the company by increasing its service offerings and adding a client like Deutsche Bank to its list.

What remains to be seen is the valuation the company will pay for Deutsche Software. For FY02 the management had given a topline guidance of 25% growth in revenues. However, this move will certainly give a boost to the bottomline.

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