HCL Technologies Stock Analysis

HCL TECHHCL Technologies (“HCL” or the “Company”) is the fourth largest Indian IT sector multinational company headquartered in Noida, Uttar Pradesh, India.  The Company offers wide range of services including IT consulting, enterprise transformation, remote infrastructure management, engineering and R&D services (ERS) and business process outsourcing (BPO), among others.

The Company has operational presence in 31 countries across North America, South America, Europe, Asia Pacific, Middle East and Africa with its largest market being the United States of America, from where HCL generates 55% of total revenue (FY 2016).

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Industry Outlook

The Indian IT sector can be broken up into two components: IT Services and BPO; both included make up a U.S. $ 148 billion industry. NASSCOM projects a  continuous growth of 13% in the sector driven by key technologies like digitalization, internet-of-things, smart grids, cloud computing, etc, enforced by PMO’s ‘Digital India’ project to give government support and assurances to the sector as a whole and its professionals. The sector’s largest share of business comes from financial services (~41%). The Indian IT Sector comprises more than half of Indian GDP, which is fastest growing in the world (FY16) and thus plays a most vital role in country’s economy.

it sector

Business Verticals

HCL Tech broadly functions under three business verticals:

hcl technologies segment revenueSoftware Services

The Company offers various application services such as business analytics, business assurance and testing, CRM, e-commerce, omni-channel, HCM, integration and middleware, enterprise content management etc. HCL has collaborative partnerships with SAP, Microsoft, Oracle, IBM, HP, TIBCO, etc to serve a variety of needs from financial services, consumer services, life sciences and healthcare, and manufacturing industries.

IT Infrastructure Services

This business vertical offers solutions such as data-center management services, end-user computing services, managed security services, application management, embedded and mechanical product engineering etc. HCL serves aerospace and defense, automotive, consumer electronics, industrial manufacturing, medical devices, networking and telecom, office automation, semi-conductor, server and storage, etc clients through this vertical.

Business Process Outsourcing (BPO) Services

HCL provides next-gen BPO services to more than 100 clients across industries. In this segment, HCL employs over 14,000 professionals working through 34 state-of-the-art delivery centers across India, the USA, Europe, Ireland, UK, Latin America, and the Philippines, HCL leverages its IGDM (Integrated Global Delivery Model) to provide customers with best-in-class services.

What’s Driving the Stock?

Consistent Growth

The Company has shown immense growth in recent years. HCL’s net worth has quadrupled from Rs. 6,288.83 Cr in June 2010 to Rs. 24,224.41 Cr in June 2016. The Company delivered superior return on equity (ROE) 38% in 2016. HCL further authenticated its business by boosting Net Profit Margin to 36.99% in June 2016.

Distinguished Dividend Payer

The Company’s management is known to award the shareholders with dividends throughout the year. This practice of enticing shareholders has created a brand name of HCL among peers as the most distinguished dividend payer.

hcl technologies dividend

Expansion Prospect: HCL’s acquisitions

In striving to establish HCL in more mature businesses, the Company, unlike its Indian peers, hasn’t shied away from making large acquisitions in the past. HCL Technologies in Feb, 2016 closed $133 million deal to buy the external IT services business and end end-to-end internal outsourcing of the Sweden based Volvo Group. The Company gained appreciation from market critics and commentators through this megadeal. Prior to this, the Company also acquired Mumbai-headquartered firm Geometric for $190 million to reinforce HCL’s already well-institutionalized Engineering and R&D service (ERS).

Strong Indian GDP and Service Sector

Indian is the fastest growing large-economy in the world increasing at the rate of 7.3% for 2015. Indian Service sector is a major contributor to the economy, as mentioned above, at about 64% of India’s GDP (According to Central Statistical Organization). By 2020, India will have the largest population belonging to working age group and will achieve the feat of youngest country of the world.

Market Positioning

The Company, despite facing cut-throat competition, has managed to position HCL’s brand as leader in various fronts. These include endorsement from foreign research companies like Forrester Wave and Gartner, which act as critics of Indian IT sector to differentiate companies for their clientele; positioning HCL as market leader for global infrastructure outsourcing, data center outsourcing, infrastructure utility services, worldwide cloud professional outsourcing, communication outsourcing, among other several IT amenities.  

What’s Dragging the Stock?

Relentless Competition

HCL Technologies, being one of the biggest IT multinational, faces extreme competition of IT behemoths like Tata Consultancy Services (TCS) and Infosys. TCS leads the group with an enormous market cap of Rs. 521,986.07 Cr, making TCS the largest company of India across all sectors. Future competitive advantages and disadvantages largely depend on the working and efficiency of management.

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*As on 6 Aug 2016

Exposure to Currency Risks

The Company gains almost entire revenue in foreign currency while most of the costs are incurred in INR. This largely exposes the Company to exchange differences risk. HCL Tech could faces adverse losses as the INR strengthens against foreign currencies like USD, Euro, and GBP. The Company, however, has deployed hedges to mitigate this risk in the form of forward contracts and options.

Missed Deal Renewals

In the pursuit to encompass growth in emerging business verticals, HCL Tech has failed to renew various deals of some top clients. This highlights low retention level for HCL as compared to rivals with high retention rate. HCL technologies has missed deal renewals with companies such as Xerox, UBS Group, Microsoft, Reader’s Digest, GlaxoSmithKline, UTi Worldwide, Singapore Stock Exchange, etc in fiscal year 2015 and 2016. This business erosion typically costs HCL 3-5% of total revenue annually.