HCL Tech: Good medium-term bet

Krishnan Thiagarajan

Recommendation : At the current market price of Rs. 1,177, HCL Technologies represents a good investment opportunity for investors with a medium term perspective.

The sharp downtrend in the stock from a high of Rs. 2,800 in February to the current price of Rs. 1,177 and any further declines can be used to build exposures from a medium to long-term perspective. Given the strong fundamentals and sharp focus in the software services segment, HCL Technologies ranks as one of the frontline software companies in India.

Suitability: Given the strong order book position and fundamentals, the HCL Technologies stock represents one of the better exposures in the information technology sector. Investors seeking portfolio diversification across top quality stocks in the IT sector and willing to bear the risks associated with the tech sector can consider investing in the stock.

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Facts: HCL Technologies is a company promoted by Mr. Shiv Nadar, the promoter of NIIT and HCL Infosystems. HCL Technologies operates mainly through subsidiaries and a series of strategic alliances. It has also incorporated subsidiaries to cater to every major geographical niche. HCL Technologies has 10 client dedicated centres (to which it has added two more in the third quarter of 1999-2000) and has close to 225 clients. The employee strength of the company has grown to 3236, with 287 employees added in the third quarter ended March 31, 2000.

For the nine months ended December 1999, on a consolidated basis, HCL Technologies has reported a 37 per cent growth in revenues to Rs. 272.50 crores (which is almost equal to the turnover for the year ended June 30, 1999). The post-tax earnings grew by 104 per cent to Rs. 127.33 crores.

With a substantial rise in the contribution of Internet/e-commerce revenues and offshore business, the operating profit margins (excluding other income) improved by 3.4 percentage points to 41.78 per cent. The performance has been bolstered to a large extent by the good third quarter performance by HCL Technologies. The per share earnings on an annualised basis (after excluding extraordinary income and relevant tax) works out to Rs. 11.60.

In the third quarter, HCL Technologies had started two new overseas development centres, one for KLA Tencor and the other for a Japanese electronics company. It has also set up a test laboratory for emerging cellular technologies for a client in Europe.

HCL Technologies already has long-term business contracts in excess of Rs. 1,600 crores to be executed over a period of five years. It is also scouting for acquisitions with a predominant portion of the Rs. 823 crores mobilised from its initial public offering set aside for that purpose. These acquisitions would partly address their concerns relating to growth.

The stock is currently trading at a price earnings multiple of 101 times the annualised consolidated per share earnings for the nine months ended March 31, 2000. In order to justify the current valuations, HCL Technologies would be required to a post a rate of growth in profits of around 100 per cent, at least in the next couple of years. It may be comfortably placed to achieve this growth.