HCL Tech

HCL Tech is IT’s stock market star

 

 

 

 

 

BANGALORE: Among the big Indian IT companies, HCL Technologies has been the undisputed star of the stock markets in recent years. It's the smallest of the top five, and has tended to receive the least public attention - overshadowed by TCS' and Cognizant's strong performances.

But the $5-billion, Shiv Nadar-promoted company's rise has been phenomenal. Over the past three years, its share price has risen by 249%. In comparison, TCS was up 139% and Infosys, the worst performer, just 34%. The gap between HCL and the rest was equally significant over the past year. HCL rose 64%, TCS and Cognizant both grew around 35%; Infosys was once again the laggard at 15%.

There's good reason for this. Its revenue growth has been consistently high, and above the industry average growth. But what's been remarkable has been net profit growth, which was 42%, 50.5% and 30.9% in dollar terms in each of the past three years (Infosys' respective figures were 1.5%, 0.5% and 14.5%).

The company's operating margin - one of the best measures of the efficiency of a company's operation - used to be 14% three years ago, when Infosys' was close to 30%. In the past quarter, it was 24.2%, just a shade behind Infosys' 25.1%. In just the past year, it improved the operating margin by nearly 4.5 percentage points.

Investors use a measure called the price-earnings (PE) ratio to evaluate the relative attractiveness of a company's stock price. It is a valuation multiple that reflects earnings/profit growth and the predictability of this growth. Infosys and Wipro have traditionally had a much superior PE ratio, but Pramod Gubbi, director of sales in brokerage firm Ambit, says he expects HCL Technologies' PE ratio to cross that of Infosys and Wipro over the next four quarters. In other words, investors will then be willing to pay a higher price for a dollar of HCL earnings, than for a dollar of Infosys or Wipro earnings.

Varun Vijayan, IT analyst at the brokerage firm PhillipCapital, notes that HCL Technologies has outperformed its peers, expanding its margins and improving operating cash flows in the past two years. "They have been closing $5 billion worth of deals in each of the last two financial years, and a large chunk of it is coming from new clients and expanded scope of work in some of the service lines," he says.

HCL discovered its pot of gold in an area called infrastructure management services (IMS). It recognized - much before most of its Indian peers - that this was a space ripe for large-scale outsourcing, and also one where Indian vendors could outbid global players like IBM and HP. IMS involves the management of the entire IT infrastructure of a company, including equipment, data, related policies & processes - an area that's not core to most companies and yet an increasingly important part.

In the past few years, IMS has grown extremely rapidly for HCL, many of the contracts being those that were previously handled by global IT majors. HCL Technologies CEO Anant Gupta recently told TOI that a big reason for this was that HCL had no vested interests in the space. "Unlike some of our global competitors (read IBM, HP, Dell), we don't have to sell servers, storage or networks to customers, so customers have confidence we will give them the best options," he said.

The pace of growth in the space has slowed down a bit, but it is still winning big contracts. In just the past few months, it won a $500-million contract from Pepsi, a $400-million contract from DNB Bank, Norway, and a $400-million contract from Alcatel-Lucent.

Gubbi says HCL is still several steps ahead of peers with respect to selling and delivery capabilities in IMS and that IMS still has a lot of headroom for growth. Dipen Shah, head of private client group research in Kotak Securities, however notes that HCL Tech's growth from infra services has slowed down in the last two quarters while Wipro is showing some good momentum in terms of deal wins. "We are seeing contrasting trends with regard to these two players. Though PE valuations of Wipro and HCL are somewhat similar, we will need at least 2-3 quarters to see how the action pans out," he says.

Gubbi is also impressed by HCL's innovative approaches towards relatively commoditized service lines such as application support and maintenance, and says it is able to cross-sell application management services to its IMS customers. HCL's ALT ASM offering focuses on a ruthless cut down of waste in application support and maintenance, and is said to be seeing significant traction.

The division is now headed by Ajit Kumar, an Accenture veteran who came to HCL a year ago. In 2012, HCL brought Prithvi Shergill from Accenture to head HR. These are signs that the company is trying to combine international best practices with India's outsourcing advantage. For now, the strategy looks to be working perfectly.