• SEPTEMBER 27, 2001

HCL Tech: Strengthening service offerings

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.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst)
103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407