HCL Tech: The favoured child - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

HCL Tech: The favoured child

Dec 18, 2002

In a surprise move, HCL Technologies has announced plans to acquire the software exports business of a group company, HCL Infosystems. The acquisition will be made by issuing 7 m shares of HCL Technologies to shareholders of HCL Infosystems. For every seven shares of HCL Infosystems held, shareholders will get 2 shares of HCL Technologies. From HCL Infosystems shareholders perspective
According to the press release, the software exports business of HCL Info (softex) had revenues of Rs 1.7 bn for the year ended June 2002 (15% of the total revenues). Considering the current market price of Rs 191 of HCL Technologies, the software exports division has been valued at Rs 1,354 m. This works out to a market capitalization to sales ratio of 0.8x. This is at a significant discount to the valuations of other software companies with similar size. However, low margins could be one of the reasons for the discount in valuations. The softex business had a net profit margin of 10% as compared to more than 20% plus margins that is a generally seen for the software companies. A very interesting point to note is as of 30th September 2002 the promoter’s hold 77.1% in HCL Technologies, while the holding in HCL Infosystems is much lower at 63.4%.

CompanyMarket cap
(Rs m)
FY03E Sales
(Rs m)
Market Cap/
HCL Info (exports)* 1,354 1,700 0.8
HCL Tech 54,511 19,133 2.8
Mpahsis 12,040 3,398 3.5
VisualSoft 4,511 1,212 3.7
Digital 19,816 4,025 4.9

Going forward, HCL Infosystems operating margins that have been steadily declining for the past few years could slide further south, as the company’s revenues will now largely come from its hardware manufacturing and trading activities. These businesses have traditionally much lower margins as compared to software services. Thus, company might find it tough to justify expectations of a 6% growth in earnings that is embedded in the current market price going forward. Due to intense competition, the realisations for the hardware industry have been under pressure in the recent past and the trend is likely to continue going forward.

From HCL Technologies shareholders perspective
HCL Technologies has been facing tough times. For FY02, the company managed to post a 16% growth in topline, which is way below the industry average. This is due to the fact that its core business of technology development services that contributed 49% to the total revenues at one point of time has been facing weakness. Infact for 1QFY03, the contribution from this revenue stream was down to 33% and revenues declined 8% sequentially. To counter this, the company has been aggressively buying growth. Previous acquisitions include Deutsche Software that gave the company presence in the BFSI (Banking, Financial Services and Insurance vertical) and Apollo Contact Centre that gave the company entry into the call centre business.

This current acquisition will give HCL Technologies an entry into the packaged software implementation and support business. This has been one of the fastest growing segments of the IT services industry. This is due to the fact that during the IT spending frenzy a large number of corporations had spent significant amounts in buying ERP and CRM packages like SAP and Siebel with a significant number of licenses. However, inspite of buying a large number of licenses, these organisations today are using only a few. But to get more from their existing investments they would like implement these packages for as many users as possible. Thus, the spending is directed towards getting more from existing systems rather than buying new software and licenses. And Indian software companies score over their foreign counterparts in cost arbitrage. Thus, the demand for services like package implementation has been growing swiftly.

Package implementation (PI): Hot...
Revenue growthFY021QFY03*2QFY03*
*QoQ revenue growth

At the current market price of Rs 191, HCL Technologies is quoting at a P/E multiple of 12x its FY03 estimated earnings. Addition of a new business stream, strong brand name and existing market infrastructure will add pace to the company’s topline. HCL Technologies is working towards gradually de-risking its revenue streams and is foraying into high growth areas. However, it will take some time before the positive impact shows. ( Read more)

Equitymaster requests your view! Post a comment on "HCL Tech: The favoured child". Click here!


More Views on News

HCL TECHNOLOGIES 2020-21 Annual Report Analysis (Annual Result Update)

Oct 20, 2021 | Updated on Oct 20, 2021

Here's an analysis of the annual report of HCL TECHNOLOGIES for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of HCL TECHNOLOGIES. Also includes updates on the valuation of HCL TECHNOLOGIES.

HCL TECHNOLOGIES Announces Quarterly Results (2QFY22); Net Profit Up 3.7% (Quarterly Result Update)

Oct 18, 2021 | Updated on Oct 18, 2021

For the quarter ended September 2021, HCL TECHNOLOGIES has posted a net profit of Rs 33 bn (up 3.7% YoY). Sales on the other hand came in at Rs 207 bn (up 11.1% YoY). Read on for a complete analysis of HCL TECHNOLOGIES's quarterly results.

HCL Technologies Slips 2% After June Quarter Results (Views On News)

Jul 20, 2021

The company's results have missed street estimates for the second consecutive quarter.

India's Top 4 IT Companies are Struggling. Here's Why... (Views On News)

Oct 22, 2021

As attrition rates are unbelievably high, top Indian IT companies are going for big-ticket raises, and much more hiring this year.

If You had Invested Rs 1 Lakh in TCS in 2011, this is how Much You Would have Today (Views On News)

Nov 30, 2021

Did TCS perform better than the market and its peers?

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

India's Top 5 Monopoly Stocks to Watch Out for (Views On News)

Nov 30, 2021

These 5 companies dominate their sectors with a huge piece of the pie.

6 Penny Stocks that Rallied 1,000%+ in One Year (Views On News)

Dec 6, 2021

These penny stocks shed their penny status by surging 1,000% or more in the last one year.

The Biggest Winners and Losers in India's Transition to Electric Vehicles (Profit Hunter)

Nov 26, 2021

How India's EV transition could be a major headwind for the incumbents.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Dec 9, 2021 (Close)


  • Track your investment in HCL TECHNOLOGIES with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks