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HCLTech: Riding on the network wave - Views on News from Equitymaster
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  • Dec 12, 2000

    HCLTech: Riding on the network wave

    There is a global shift towards a networked economy. The need of the hour is to send as much data, voice and video as possible over the networks in as less time as possible. The technology companies are working furiously to meet this demand.

    After voice and video over the Internet the next wave will be a need for intelligent appliances. At present, the technology is mostly in the R&D stage but it is going to become popular as it improves the quality of life. Just imagine the comfort if all the devices in your house and office worked according to your schedule automatically. This calls for smart cards, game consoles, intelligent cell phones, set top boxes, hand held computers and home appliances. Server appliances include storage, web, intranet, device control, and home network servers. Appliances allow users to utilize computing technology in smaller, lighter and more mobile forms. The market for information appliances is expected to grow from a mere Rs 42 bn in 1997 to Rs 651 bn in 2001, a CAGR of 93%.

    HCL Technologies is one of the three major Indian software companies that focus on technology, the others being Wipro and Hughes Software. HCL Techs’ interests lie in the area of technology development, application engineering, software engineering and networking services. Currently, the focus areas for HCL are Internet & e-commerce and enterprise solutions. For FY00 (June ending) e-commerce contributed 41% of the total revenues amounting to Rs 3,810 m.

    HCL has experience in the development and application of embedded software, networking and telecom protocols and VLSI (very large scale integrated circuits) design. The company’s expertise in embedded systems includes microprocessor/ micro-controller architecture, real time operating systems, device drivers, hardware and firmware design, protocols and object oriented methodologies in embedded systems. The technology services division contributed 34% of its turnover of Rs 9,260 m in FY00 (34% of revenues).

    (Rs m) 1QFY00 1QFY01 Change 1QFY01 2QFY01 Change 1QFY01 2QFY01 Change
      HCL Technologies Hughes Software Wipro
    Sales 2,740 3,140 14.60% 358 444 24.0% 6,185 7,404 19.7%
    Operating Profit Margin (%) 26.3% 29.0%   31.2% 33.4%   21.8% 24.2%  
    Profit before Tax 830 970 16.87% 104 146 40.7% 1,196 1,738 45.3%
    Profit after Tax/(Loss) 730 960 31.51% 93 134 44.4% 1,078 1,540 42.9%
    Net profit margin (%) 30.3% 30.6%   25.9% 30.2%   17.4% 20.8%  
    Diluted number of shares 282.8 282.8   33.3 33.3   229 231  
    Diluted Earnings per share* 10.3 13.6   11.1 16.1   18.8 26.7  
    P/E (at current price)   54     58     112.50  
    * Annualised

    Compared to the others, HCL’s performance in 1QFY01 was not very exciting. Infact, if we remove the other income of Rs 160 m from the HCL’s profits then the bottomline growth is just 9%.

    Hughes has the advantage of being smaller in size, but Wipro, though much in larger in size, has shown better performance. The reasons for Wipro’s low operating margins are its other businesses (viz. hardware and vegetable oil) that traditionally have had lower operating margins.

    Wipro and Hughes have an upper edge in terms of the clientele they can boast of. The potential for growth in the technology and e-commerce sector is expected to drive the topline for these companies. HCL now needs to give a hard look to its business and work on improving its billing rates and, thus the operating margins. The two immediate challenges facing HCL are rising competition and increasing wage costs. Both will affect the margins. Also, if the subsidiaries and joint ventures fail to perform, HCL’s other income will be affected. Therefore, the call is to put in a little extra effort that will show HCL in better light. Already, its technology focus is a big positive, it needs to convert that into a much healthier bottomline.



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