HCL Technologies is still a bargain

Among the top-tier IT companies, HCL Technologies has been extremely consistent in reporting improvements in financials over the past three years.

Its revenue growth rates have been ahead of the industry’s (12-14 per cent in dollar terms) and closer to what market leader TCS has managed, leaving Infosys and Wipro behind.

Healthy client additions, growth in key verticals such as financial services and manufacturing, sustained leadership in its infrastructure offering, and increased focus on fixed-price contracts to augment margins are the key positives for HCL.

At ₹1,371, the stock trades at little less than 14 times its likely per-share earnings for FY15, which is lower than the valuation multiple of slower growing peers such as Infosys and Wipro (around 15 times) and much lower than TCS (19 times).

As defensive stocks correct, HCL’s shares too have declined and may now present an attractive option for investors with a two-year horizon.

In the first nine months of FY14, HCL’s revenues have grown 30.5 per cent to ₹24,494 crore and net profits 59.2 per cent to ₹4,536 crore. Its operating profit margins have been improving the past couple of years and stand at a healthy 25.4 per cent for the current year, which is close to what other large-size peers have managed. The company has now become an entrenched top-tier player.

In the last one year, HCL added one client in the $100-million category and four in the $50-million bucket. It has increased focus on the more lucrative deal range of $10-40 million, where the company has added 30 customers. Recently, HCL bagged a contract worth ₹2,400 crore from DNB Bank, based in Norway, which is a multi-year project. The deal size is among the largest in the IT industry in recent times.

Financial services and manufacturing, which account for nearly 60 per cent of its revenues, have been the growth drivers, as also public services (10 per cent of revenues).

Infrastructure services, in which it is among the top players, continue to expand strongly. This offering contributes to nearly a third of its revenues. Geography-wise, while contributions from North America have been slowing, they have been more than made up by the traction in Europe.

Margins have been a key focus for the company and fixed-price (and managed services) contracts, which ensure better profitability than time and material projects, have increased contributions steadily and now account for 55.7 per cent of HCL’s revenues. Its utilisation, at 84.2 per cent, is among the highest in the industry and is another key margin lever.

Attrition, at 16.9 per cent, is high compared to TCS and Wipro. Any wage hikes given to stem this may affect margins.