Stock Fundamentals

HCL Technologies: Well-guided

Vivek Ananth | Updated on May 26, 2019 Published on May 25, 2019

Robust traction in many verticals and large-sized client additions are key positives for the company

As a top-tier IT service player that has consistently grown faster than the industry and, yet available at a reasonable valuation, HCL Technologies is an attractive bet for long-term investors.

Despite growing consistently at double-digits in dollar terms — it displaced Wipro to become the third-largest IT player in India in FY19 — over the past several years, the stock is at a discount to peers in the space.

HCL Tech now trades at a trailing 12-month price-earnings multiple of 14 times, which is below that of most of its peers like Tata Consultancy Services, Infosys and Wipro (16-25 times). This discount makes it a solid proposition for investors with a two-year horizon.

Robust traction in five of its seven verticals of operation, large-sized client additions and a good show in metrics such as utilisation are positives for the company. In FY19, HCL Tech’s revenue grew at a robust 11.8 per cent over the previous fiscal in dollar terms, which was higher than almost all top-tier peers and the industry as well. The company’s EBIT margin has remained stable at around 19.5 per cent.

Digital in progress

In FY19, verticals such as technology and services, retail & CPG, life sciences and telecom grew at 16.8-30.7 per cent over the previous fiscal. This growth suggests broad-based traction across segments.


For the full financial year 2018-19, the net profit rose 15.3 per cent to 10,123 crore Y-o-Y, while revenue rose 19.5 per cent to ₹60,427 crore. HCL Tech’s earnings before interest and tax margins came in at 19.5 per cent. The company managed to beat its guidance for revenue, and margins were within the guided range.

Three years ago, HCL Tech announced a strategic blueprint called Mode-1,2 and 3. Mode 1 includes traditional services-related businesses such as infrastructure management services, application services and BPO services. Mostly its core services offering, Mode 2 comprises cloud and security services and digital services. Mode 3 is HCL Tech’s effort to build products and platforms to create its own ecosystem of products and includes its intellectual property partnerships for products of other companies.

At the end of FY19, Mode 1 makes up 71.6 per cent of its total revenue, while Mode 2 and 3 together make up 28.4 per cent. Three years ago, the proportion of revenues was 81.4 per cent and 18.6 per cent for Mode 1, and Mode 2-3 together, respectively.

Mode 2 and 3 are high-growth businesses that earn HCL Tech higher margins. The increased investments in new growth opportunities have weighed on margins.

In FY19, in three out of four quarters, the company bagged the highest deals for a quarter, showing a decent deal pipeline. During the year, the company added two customers in the $100-million contract value category, four in the $50-million bucket, four in the $40-million band and 13 in the $10-million zone.


The utilisation rate for HCL Tech is quite healthy at over 85 per cent, among the highest in the industry. Attrition, after increasing in the previous quarters, is showing signs of stabilising, though, at over 17 per cent, it is still a concern.

Guided range

HCL Tech’s 2019-20 revenue growth guidance is 14-16 per cent in constant currency terms, while margins are expected to be in the 18.5-19.5 per cent range, lower than that of FY19.

The company expects to take a hit in its margins during the Q1FY20 due to process-related expenses for IBM product acquisitions.

In December 2018, HCL Tech announced the purchase of seven of IBM’s products for nearly $1.8 billion. It already had intellectual partnership with IBM for five out of seven of these products. The company expects to rejuvenate these product lines and use them as an entry point to push its other products and services to existing customers.

This deal is expected to be completed by end- May 2019. HCL Tech expects an additional $650 million in revenue from the second year. The incremental annual revenue in FY20 is expected to be $625 million. This deal, the company expects, will add 15 per cent to its earnings per share.

Embedded risks

Inorganic growth in revenues (from companies HCL Tech has acquired) helps the company post industry leading revenue growth. The dependence on acquisitions to push revenue growth would mean each acquisition must add to the top-line growth from the get-go. If the new businesses acquired falter, then revenue growth might be hit.

Then comes the risk from the current US-China trade war. This could lead to clients curtailing their IT spends. Foreign currency fluctuations can curtail its ability to meet the guided numbers. This includes headwinds due to uncertainty on Brexit.

Published on May 25, 2019

A letter from the Editor

Dear Readers,

The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill. Everyone has been impacted.

Including your favourite business and financial newspaper. Our printing and distribution chains have been severely disrupted across the country, leaving readers without access to newspapers. Newspaper delivery agents have also been unable to service their customers because of multiple restrictions.

In these difficult times, we, at BusinessLine have been working continuously every day so that you are informed about all the developments – whether on the pandemic, on policy responses, or the impact on the world of business and finance. Our team has been working round the clock to keep track of developments so that you – the reader – gets accurate information and actionable insights so that you can protect your jobs, businesses, finances and investments.

We are trying our best to ensure the newspaper reaches your hands every day. We have also ensured that even if your paper is not delivered, you can access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute, so that you can access the information you want anywhere, anytime.

But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. Sustaining our quality journalism has become extremely challenging. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.

I appeal to all or readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. Doing so is easy. You can help us enormously simply by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section that offers rich investment advice from our highly qualified, in-house Research Bureau, the only such team in the Indian newspaper industry.

A little help from you can make a huge difference to the cause of quality journalism!

Support Quality Journalism
This article is closed for comments.
Please Email the Editor
You have read 1 out of 3 free articles for this week. For full access, please subscribe and get unlimited access to all sections.