ValuePickr Forum

HCL Technologies

As things stand today, HCL Tech remains ignored due to management not providing any guidance for fy17. They have 2 acquisitions to digest first.
Based on valuations, downside seems limited unless there’s a major negative earnings de-growth coming up.
705-710 seems like a strong technical support.
Disc: Invested and waiting to add more near the support levels.

As per HCL’s 2015 Annual Report,it generates 34.7% revenue from Infrastructure management business(IMS).ok,so what is infrastructure management:
The same AR provides the answer for this:
IMS includes: Next generation data center and cloud services, business services
management, next gen network services, digital operations, information security and
GRC services, cross-functional services, mainframe and AS/400 management, and
systems integration.

When Ashish Dhawan of Chryscapital invested in HCL in 2008,his investment thesis was centered around HCL’s IMS vertical.In his own words,"We invested in HCL Technologies betting on the fact that one of its largest verticals was infrastructure management services. No one saw that. HCL was the best in that business.”

Now what has changed on this vertical?
Enterprise cloud services were not gaining traction 5-7 years ago as the industry was skeptical around hosting their data in cloud services.For most companies,data is the key asset and no one wanted to entrust their data to third party vendor then. Now in the last 3 years,enterprise cloud solutions like Amazon Web Services are witnessing strong growth in this vertical.In fact,AWS is racing ahead than its top 4 competitors like Salesforce, Microsoft, IBM, and Google.It is currently reporting close to $2 billions sales every quarter with OPM around 23%.

So,who might loose in this race?
Companies like HCL might loose their revenues in this segment.Becuase AWS is growing at the cost of small infrastructure players like HCL.Mainly beacuse of the pricing issue,with the scale Amazon has,it can aggressively price its offerings at a ridiculously low price which no one else could compete.May be that is the reason they are expecting to touch their annual revenues from AWS to touch the $20 billions mark by 2020.

When a company generates more than one-third of its revenue on a particular vertical and if it is under serious threat,I would wait and watch before taking a call.

Request others to add more color on HCL’s competitive advantage on its IMS business in case if someone knows more.

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This article is bang on,nails it. I am into analytics and I can see, analytics being so misinterpreted where still people think it’s about writing codes in R, Python where as the industry is taking major shift by azure, aws type platforms. Designing the problem and solution which can have ROI impact is the way IT skills are shaping up and there is a price to quality

@Sambath
Very informative post.

But still, company’s with good management figure out the ways to get out of the problems. And HCL Tech is management enrich company.

However still, it is likely to see a downturn in IT sector which might not recover for a long period.

@Sowmay: I fully agree on the management pedigree.Currently the problem with IT sector is there is no clarity on the immediate future on what will be impact of technology disruption that is happening around in all industries,banking to be specific.For example most Indian companies including HCL derives a significant amount of revenue from banking sector .Due to digital transformation through fin tech companies ,banks prefer to partner with fin tech product companies to adopt /access/gain the latest technologies that would allow them to stay relevant in the current disruptive world.Because traditionally banks used technology to sell their services and products .Now the fin tech companies are taking over the financial industry by delivering products through ways/cost we could never imagine before.

To give you a small example,when most Indian IT giants are struggling to post decent revenues ,Indian fin tech company like Intellect is growing at 30% in the last few 2 years.So,we need to understand what makes this company tick in a subdued environment.

Couple of disruptive fin tech companies I want to highlight here : Robinhood is an online retail broker in US who offers demat account where you can trade with zero cost.How do they make money ? They do lend overnight repo with the money that is not used by us in our account.They also make money through margin trading.

Another one is credit karma where you don’t have to pay anything to check your credit history.Five years back we used to pay to check our credit history.

I can give a huge list but the point is due to fin tech companies,financial products are getting democratized.

So,it is tough to make a call what will be the impact on sales for Indian IT vendors.As these companies are just service based firms and with current business model We have to check a lot of facts holistically before coming to a decision making process.

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Best results by HCL in Tech sector. Very confident management commentary. Guided for 12-14% growth. One can not ask for better growth from a large cap trading at 14 PE and high RoE.

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Last time I heard their management saying that HCL will take 3-4 more quarters to recover their margins.

Many analysts were bearish on HCL Tech. They were bearish due to this 3 reasons as per economic times:

  1. The slowdown in the company’s infrastructure services business that contributes around 36% to HCL Tech’s revenue.

  2. The company’s margin contraction— margin has contracted in the January-March quarter compared to same period last year.

  3. Investor sentiment has also taken a hit because of the management’s decision to stop giving margin guidance.

Internet was flooded by bearish market sentiments:

But now after the recent positive quarter result, every adviser, broker are highly bullish. Targeting for above 900.

The strong conclusion I came to:

“Analyst follows quarter results and the crowd follows analysts”

  • When HCL Tech announced weak reports in March end, analysts showed their bearish trend for future results and highly recommended to stay away from this stock. Eventually, the market crowd also followed them. Final outcome = Red stock.

  • When HCL Tech announced strong reports in June end, analysts showed their bullish trend for future results and highly recommend others to enter the stock. Eventually, the market crowd also followed them. Final outcome = Green stock.

IT sector is really uncertain. Hard to understand. What’s your opinion?

3 Likes

IT sector has matured and will have slower growth. A good large cap investment with low risk and moderate returns.

Disc: Reduced my holding after recent run up. Will look to add in any major correction.

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HCL Technologies Ltd has informed BSE regarding a Press Release dated August 05, 2016 titled “HCL Recognized as a ‘Leader’ in Gartner Magic Quadrant for Data Center Outsourcing and Infrastructure Utility Services, Europe”.
http://www.bseindia.com/corporates/anndet_new.aspx?newsid=e086afdd-5d12-40cb-bc77-f3879d3a69ae
Disc - Bought during recent correction @ 710 and like to add at this level

Good results and the guidance is very good for the future. Importantly it has also got over that 800 for good this time. Yes, in hindsight that 52 week low was a fantastic buy :slight_smile: More to come I hope…

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I was not able to find Q3 FY16 consolidated results for HCL Tech. Only standalone results are available for the said quarter.

I checked on both the exchanges.

I am aware that IT space is changing and disruption Etc and how India IT industry model may not provide any competitive advantage over the next many years.
But at sub 750 odd prices isn’t there value in this space? This company is not going under in the next two three years. It is acquiring companies, guidance is much above peers; throws out free cash, has good Roe etc- p/e will be around 12 earnings ratio for year ahead
It does sounds like a low hanging fruit - sounds safer than chasing Kitex or Wonderla.

Any comments from anyone with specialised knowledge of HCl

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I am dealing with redeemable preference shares for the first time. I had shares of Geometric in my account and now I have HCL shares. But I do not see 3d PLM shares in my account. Where do I check for them?

Also what happens if I do not redeem?

Any help is appreciated.

Thanks,
Lav

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I feel HCL Tech numbers look good as compared to its peers. Still growing decently with maintaining the OPM above 20%. In the present market scenario the risk reward in HCL looks good.

Tracking position Held

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Net cash flow is 4265 crores, they might be looking for acquisitions. ROCE is maintained at 31% with ROE of 25.7, PEG Ratio: 0.72, CROIC: 34.33%. It will be good to add HCL Tech in watchlist.

https://www.crunchbase.com/search/acquisitions/field/organizations/num_acquisitions/hcl-technologies

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Hi. Has everyone received their bonus shares. I sold my shares after the value halved and my bonus shares is not yet credited. What should I do?

Bonus shares already credited to demat accounts on 13th Dec. Record date was 7th Dec,hence if you sold after exbonus,but if you have delivered the shares to your broker on or before 7th Dec,the bonus shares will be in broker’s client pool account . You can claim the same from them.

My bonus shares are also not credited till now. Maybe till Friday I will get it in my demat account. Since I m holding for long term and hence not much worried.

Check it in d ideas(eservices) of NSDL…if it has gotta credited there nothing to worry. I got mine today only

https://eservices.nsdl.com/