INVESTMENT ANALYSIS AND

PORTFOLIO MANAGEMENT
ASSIGNMENT – I

FUNDAMENTAL AND TECHNICAL

ANALYSIS OF HCL TECHNOLOGIES

Submitted To:
Dr. Ashish Garg

Submitted By:
Akash Goyal
(69FI/09)
 Fundamental Analysis of HCL Technologies

PEST ANALYSIS OF IT INDUSTRY

POLITICAL

 Tax rates in India for the hardware sector are 20% - 30% plus which creates obvious
possibilities for the further reform and faster growth.
 10Year Special Economic Zones programs and tariffs change to promote the
hardware production.
 26 new projects as a part of a national e-Government Plan.
 Tax initiative by government to ask state government to fix VAT at 4% in the hope of
attracting investors.
 Manufacturing Associations of IT (MAIT) an Electronic Industry Association of India
(ELSINA) is also pressing for reduction in land acquisitions rights by stamp duty
exemptions.

ECONOMIC

 In last 18months there is growth in sales in PCs and computer hardware, mainly due
to lower prices.
 But as per the trade cycle rotation there will be a possible slowdown in demand.
 IT plays an important role in bringing 50% of rural household to the banking
innovation.
 IBM, Dell, Lenovo has announced new investment to expand capacity
 Compound Annual Growth Rate is 15% between 2005 – 2010.
 Due to the depreciation of the Rupee in comparison to Dollar the software and
outsourcing has suffered negatively due poor exchange rate.
 Industry contributes upto 7% in GDP.

SOCIAL

 Only 1.3% of people in India own a computer.

 Age Distribution :- 45% of the population is under 25.
 Regional imbalance and low incomes.
 Inward Investment can lead to better job opportunities.
 Still Abroad is the fascination among the IT professionals to work.
 IBM, Wipro and Infosys recruit 15000-20000 graduates each year.
 Business practices varies region wise
TECHNOLOGICAL

 Plans by AMD to set up the country’s 1st chip fabrication (an investment upto
US$3bn) to stimulate local production and lower prices.
 Multimedia features and Entertainment to bring bollywood among the masses.
 Lenovo to build in TV tuner cards capable of connecting to a TV antenna.
 During the year Satyam entered into an agreement with US based G-LOG, to offer a
supply chain management and supply chain execution solutions to its customer.

Company Profile:

HCL Technologies Limited was incorporated in 1991, as HCL Overseas Limited. The
certificate of commencement of business was received on 10th February 1992. On July 14,
1994, the name of the Company was changed to HCL Consulting Limited. The company
provides software-led IT solutions, remote infrastructure management services and BPO. In
1996 the 50:50 joint venture with Perot Systems Corporation was formed to provide access
to high value client base of Perot Systems under the name of HCL Perot Systems NV. HCL
Technologies focuses on Transformational Outsourcing, working with clients in areas that
impact and re-define the core of their business after its IPO in 1999 with aim of foray into
the global IT landscape and in the same year again the Company changed its name to HCL
Technologies Limited.

The company encompasses global offshore infrastructure and its global network of offices in
18 countries to deliver solutions across selected verticals including Financial Services, Retail
& Consumer, Life Sciences & Healthcare, Hi-Tech & Manufacturing, Telecom and Media &
Entertainment (M&E). HCL Tech started to create wholly owned subsidiaries to cater specific
geographic regions from the year 1999. HCL has the widest service portfolio among Indian IT
service providers, with each of its services having attained critical mass.

In the year of 2000 the company has set up a dedicated offshore development centre in
Chennai for KLA-Tencor Corporation, a supplier of process control and yield management
solutions for the semiconductor and related microelectronics industry and HCL Comnet, the
wholly owned subsidiary of HCL Technologies in association with its new partner Globeset
Inc for scouting largest Internet Service Providers and payment gateways in India to
introduce Net security management solutions. The Company launched the Nokia
professional centre in New Delhi, second among the chain of centres across the country.

HCL Technologies has entered into a strategic alliance with Nasdaq-listed Vitesse
Semiconductor to develop software solutions for global networking markets in the year
2001 and also entered into a strategic alliance with Toshiba Information Systems (Japan)
Corporation to set up a dedicated offshore software development centre for developing
embedded software for the Japanese company. HCL Comnet Systems & Services Ltd., a fully
owned subsidiary of HCL Technologies was gone into the business of Web-enabling
applications through the launch of demand-chain management solutions.
In 2002 the company acquired Gulf Computers Inc, USA and formed a JV with Answerthink,
Inc., a leading US based provider of technology enabled business transformation solutions
to Global 2000 firms. A strategic technology joint venture was made with Jones Apparel
Group, Inc. Jones Apparel Group, Inc. a Fortune 500 Company in the same year and also
entered into a joint venture with M.A. Partners, a management consulting firm to address
software services opportunities in Global Finance Markets, especially in the areas of
Investment Banking, Asset Management and Private Banking. M.A. Partners brings a wealth
of domain expertise and clients including many of the top Global Investment Banking firms
to the JV.

In the year 2003, BT Group UK's telecom service provider gave a contract worth of $160
million for BPO service operations and the company has set up an exclusive centre in Noida
for exeucting the orders given by BT Group. The software business of HCL Infosystems
Limited was transferred to HCL Technologies Limited additionally. HCL Comnet, a wholly-
owned flagship of HC Technologies, secured Rs 31 crore network management order from
National Insurance Corporation (NIC).

HCL Technologies sets up Insurance Solutions Center in Chennai and the company has
entered into a strategic tie-up with IBM Rational Software, a division of IBM, to strengthen
its software development capabilities during the year 2004. The Company has been
conferred the prestigious Excellence in Education Award for 2004 by the Life Office
Management Association (LOMA). BPO delivery centre in Chennai gets BS7799 certification,
by the British Standards Institute (BSI) on August of the same year. The company has
Introduced Cross View; a framework based Computer Systems Validation (CSV)
methodology for the development of robust software applications in the Life Sciences
arena.

During the year 2005 SEBI ties up with HCL Technologies for market surveillance and the
company formed joint venture with NEC, Japan. The company amalgamated its six wholly
owned subsidiaries with company itself, such subsidiaries are DSL Software Ltd, Shipara
Technologies Ltd, HCL Technologies BPO Services Ltd, HCL Technologies (Mumbai) Ltd,
Aquila Technologies Ltd and HCL Enterprise Solutions (India) Ltd and the course of event the
company acquired an Irish Call centre during February 2005 and this acquisition establishes
HCL's position as the single largest BPO Centre operation on the Island of Ireland. HCL's
Infrastructure Services Division ranked a 'Strong Performer' in Remote Infrastructure
Management by an International Research Firm and made a strategic partnership with EXA,
Japan in same year.

In the year of 2006 the company launched RoHS Compliance Management System for
Medical Device Users and entered $70 million outsourcing deal with Teradyne of US. HCL
developed Trusted ICT Infrastructure Platforms for BPO-ITE'S Segment and has linked pact
with Canada based electronics manufacturing services company Celestica Inc to jointly
design and manufacture electronic products for global original equipment manufacturers
(OEMs).

The company has forayed into an alliance with $200 million Saudi Arabian company namely
Advanced Electronics Company (AEC) to implement IT projects in West Asia in the year 2007
and formed a strategic alliance with Eckler to strengthen Insurance Domain expertise. The
company made US $15 million contract with Aleni Aeronautica, to provide engineering
services that will support the improvement of the C-27J Spartan production line. HCL
Venture Capital Ltd., a company incorporated in Bermuda and downstream subsidiary of the
company was merged with HCL Bermuda Ltd and HCL Technologies (Mass) Inc., a company
incorporated in United States of America and a downstream subsidiary of the company was
merged with HCL America Inc in the year 2007.

As on January 2008, HCL's Electro Magnetic Compatibility (EMC) and Durability Test Lab
located in Chennai, the first of its kind private Technology facility sector to obtained the
ISO/IEC 17025 Accreditation from NABL (National Board for Accreditation of Testing and
Calibration Laboratories, India) and a new partnership with Mark Logic Corporation,
provider of the industry's leading XML content server was made on same month of the year.
As on February 2008 the acquired Capital Stream, Inc., a US based leader in providing
comprehensive end-to-end lending and straight through processing solutions to commercial
banks and finance companies in North America worth about US $ 40 Million and in same
month company expanded global services partnership with SAP AG (NYSE: SAP). During April
2008 HCL Technologies Ltd announced to launch of its new SaaS Service Delivery Platform
(SDP) AGORA - at Software 2008 in Las Vegas and in the same month of the same year the
company launched an innovative on-demand software testing lab at Software 2008 that
allows Independent Software Vendors (ISVs) to reduce their software testing cycle times and
lower their capital expenditure on testing hardware and software.

SWOT Analysis of HCL Technologies

STRENGTHS

 Wide Range of Products and Services like Bpo’s, Software Services, Infrastructure
Management which cater into both large and medium size companies.
 Global Coverage in countries like U.S, Europe, Japan etc
 Strong employees base of upto 50000Pax.
 Support sales activities by understanding the customer business better.
 Keep upto date on what competition is doing.
 Its revenue has increased from 60.7bn in 2007 from 114bn in2009 which shows its
increasing trend.

WEAKNESS

 One of the key weaknesses of HCL is that it has lost projects in continuation like
recently BFSI cuts projects.
 HCL has always a weakness in TIER1 sectors.
 Total asset turnover is one of the weaknesses of HCL as they have always failed to
materialize its assets in right direction.
 Lack of innovation and distribution network especially in case of laptops has
reflected HCL’s weakness.
OPPORTUNITIES

 Acquisitions:-HCL has already done 3 major acquisitions like Liberta. This enables
them to expand and create opportunity for them to wide there spectrum.
 Key opportunities lie in the countries like Eastern Europe and APAC (Asia-Pacific
Region).
 Mid Market segment is the opportunity area as against fortune 200 companies.
 Opportunity of doing better on return on equity from 21.42% by beating Satyam
(26.08%)
 Increasing its market share from 9.8% vs. 19.7% (HP)

THREATS

 One of key threat for HCL and the industry as a whole is the ban of outsourcing from
India due to new regulations from U.S
 Dip in quarterly Sales by 5% can lead to loss of market share and product
depreciation.
 Small Players and manufactures are trying to enter into the segment where they can
provide much cheaper products then HCL which will be a rising competition for HCL
to stand.

Financial Ratios:
Valuation Ratio

1. Price Earning (P/E) Ratio: Over the years the P/E ratio of the company is declining
which shows the investors are less optimistic about the future growth of the
company.

2009 2008 2007 2006 2005

13.56 24.60 22.38 28.69 47.54

2. Price to Book Value (P/BV): The price to book value of Stock is 3.57 in 2009 which is
much lesser than the previous year values showing a sign of the stock is
undervalued.

2009 2008 2007 2006 2005

3.57 5.20 6.67 6.30 4.34
 Leverage Ratio

3. Total Debt-Equity Ratio: The debt – equity ratio of the company is very less which shows
the major part of financing is coming from equity so investing in such company is less risky.

2009 2008 2007 2006 2005

0.14 0.01 0.01 0.01 0.03

4. Fixed Asset Turnover Ratio: The turnover is nearby three times than the fixed asset
which shows the healthy position of the company.

2009 2008 2007 2006 2005

2.73 3.27 3.13 3.31 2.53

Liquidity Ratio

5. Current Ratio: The Company is having current ratio more than 1 which shows
company ability to pay short term obligation.

2009 2008 2007 2006 2005

1.83 1.12 1.41 0.99 0.81

6. Quick Ratio: Company is having enough liquidity for its short term obligations.

2009 2008 2007 2006 2005

1.71 1.06 1.39 0.97 0.80

Payout ratios

7. Dividend payout ratio (net profit): Over the period there is a decrease in the payout
ratio which shows there is a change in a company policy to retain more money than
to give it to investors.

2009 2008 2007 2006 2005

55.08 89.70 55.10 92.18 173.08

8. Earning retention ratio: The company shifting towards, retain more to grow
shareholders wealth

2009 2008 2007 2006 2005

48.40 26.48 10.51 8.66 -96.00
 Debt Coverage Ratios

9. Interest Coverage ratio: As the company is having very less debt its debt coverage
ratio is high which shows company is well capable of paying its debts.

2009 2008 2007 2006 2005

51.14 62.07 68.58 62.16 61.43

10. Financial charges coverage ratio: The Company shows a high financial charges
coverage ratio.

2009 2008 2007 2006 2005

43.80 51.74 46.27 45.83 32.99

Profitability Ratios

11. Operating margin (%): The Company is having good operating margin as per industry
and also its operating margin is growing over the years.

2009 2008 2007 2006 2005

29.72 26.58 24.86 26.69 24.63

12. Net profit margin (%): The net profit margin of a company is as per the industry and
it is growing after a dip in recession.

2009 2008 2007 2006 2005

20.63 16.68 29.11 21.00 22.36

13. Return on Capital Employed (%): The Company is showing a good move in return on
capital employed and in the industry it has one of the best ROCE.

2009 2008 2007 2006 2005

32.39 33.08 22.35 26.15 10.63

14. Return on Net worth (%): The Company is getting an around 30% return on its net
worth.

2009 2008 2007 2006 2005

28.59 24.29 32.17 24.78 11.51
 Technical Analysis
The current market position of HCL Tech is:

The data for analysis has been taken on a daily basis from 3 rd Sept
2009 till 3rd Sept 2010
The candle stick representation of HCL Tech Stock Prices
Following indicators are used for technical analysis:

1. Moving averages
2. MACD
3. MFI
4. RSI
5. ROC
6. Volume trading
7. Bollinger bands

1. Simple moving averages:

A Moving Average is an indicator that shows the average value of a security's price over a
period of time. A buy signal is generated when the security's price rises above its moving
average and a sell signal is generated when the security's price falls below its moving
average.

From the graph we can say that a buy signal is there as the price is more than SMA.

2. MACD:

MACD is defined is the difference obtained by subtracting the 26-day EMA of the
closing stock, index, or other security closing price from the 12-day EMA of the same
value and 9-day EMA is used as a signal line.
 a. Crossovers – When the MACD falls below the signal line, it is a bearish
signal, which indicates that it may be time to sell. Conversely, when the
MACD rises above the signal line, the indicator gives a bullish signal,
which suggests that the price of the asset is likely to experience upward
momentum.

b. Divergence - When the security price diverges from the MACD. It signals
the end of the current trend.

c. Dramatic rise - When the MACD rises dramatically – that is, the shorter
moving average pulls away from the longer-term moving average - it is a
signal that the security is overbought and will soon return to normal
levels.

Now as per MACD when the signal line is above the MACD (26, 12) there
is a buy sign so at this moment it is advisable to buy a stock.

3. MFI:

The Money Flow Index measures the strength of money flowing in and out of a security.

Calculation of Money Flow Index (MFI):

1. Typical Price = (High + Low + Close) / 3

2. Money Flow = Typical price * Volume
3. Money Ratio (MR) = Positive Money Flow/Negative Money Flow
4. MFI = 100 - (100 / (1 + MR)
MFI values below 20 suggest that the stock has been oversold and values above 80 indicate
overbuying of stock. MFI of HCL Tech lies well within the range of 20-80

4. RSI:

RSI (Relative Strength Index) compares the magnitude of recent gains to recent losses in an
attempt to determine overbought and oversold conditions of a stock. It is calculated using
the following formula:

RSI = 100 – (100 / (1+RS))

RS = Average no. of up closes / Average no. of down closes

RSI is a price-following oscillator that ranges between 0 and 100. RSI tops above 70 and bottoms
below 30. In case of HCL Tech it is within range.

5. ROC:

Rate-of-Change (ROC) indicator displays the percentage difference between the current price and
the previous price. As prices increase, the ROC rises; as prices fall, the ROC falls.

The higher the ROC, the more overbought the security; the lower the ROC, the more likely a rally.
From the graph we can see that HCL Tech shares were oversold in the month of August 10.

6. Volume trading:

Volume is the number of shares (or contracts) traded during a specified time frame. Volume
provides clues as to the intensity of a given price move. Low volume levels are characteristic of the
indecisive expectations that typically occur during consolidation periods. Low volume also often
occurs during the indecisive period during market bottoms. High volume levels are characteristic of
market tops when there is a strong consensus that prices will move higher. High volume levels are
also very common at the beginning of new trends. Just before market bottoms, volume will often
increase due to panic-driven selling.
In case of HCl Tech there is not much volatility in volume during this one year except on 24 july 2010
where we can see a very large volume. And after which the share price start increasing.

7. Bollinger band:

Bollinger Bands are curves drawn in and around the price structure that define high and low on a
relative basis. The base of the bands is a simple moving average. A measure of volatility, standard
deviation, is used to set the width of the bands making them fully adaptive to changing market
conditions. Bollinger Bands are used in numerous ways. They can be used to aid chart pattern
recognition. They can be combined with other indicators to identify entry and exit points. They can
be used to identify areas of compression and to spot the ends of extended moves

In case of HCL the price is well within the range which shows there is no major reversal in the trend.