Billionaire Lures Funds With Record HCL Margin: Corporate India

HCL Technologies Ltd., a software exporter founded by Indian billionaire Shiv Nadar, is attracting funds including UTI Asset Management Co. after profit margin widened to a record.

The Indian software maker has climbed 80 percent in this year’s best performance among the 50 stocks that make up the CNX Nifty Index. The stock’s consensus rating, or the average of analysts’ recommendations, is at 4.39, the highest among India’s four largest information technology companies, according to data compiled by Bloomberg. Tata Consultancy Services Ltd., Asia’s biggest software exporter by market value, has a rating of 3.94.

“HCL Tech is our top pick among the Indian software exporters,” said Taina Erajuuri, who helps manage more than 2 billion euros ($2.7 billion) of assets at FIM Asset Management Ltd. in Helsinki, said in an interview. “HCL’s revenue and profit margin have been very good. A weaker rupee has come as a windfall for the company and that has worked in our favor.”

New Delhi-based HCL is among Indian companies riding a recovery in the U.S. and Europe as technology spending rebounds from a trough reached following the 2008 credit crisis. HCL is winning more contracts by offering to maintain clients’ computer networks and helping them cut costs, a service that has aided in countering any drop in revenue from traditional code writing and boosting its profit margin to the widest since at least 2006 in the quarter ended Sept. 30.

Profit Growth

HCL Technologies shares rose 1 percent to 1,114.30 rupees at the close in Mumbai. The gain this year compares with a 6.4 percent advance for the benchmark S&P BSE Sensex, 66.5 percent for TCS and 45 percent for Infosys Ltd., data compiled by Bloomberg show.

Anil Chanana, HCL’s chief financial officer, didn’t respond to requests for comments on the company’s performance.

Net income has increased for 15 consecutive quarters on an annual basis, while sales have risen every quarter since 2005. Profit as a share of sales before interest costs, taxes and depreciation jumped 304 basis points to 26.3 percent in the three months through Sept. 30, the highest after TCS among Indian software makers.

Rupee Weakness

A weaker rupee, a reduction in operating costs and the expansion of network-maintenance services helped boost the gauge, according to Hardik Shah, an analyst at K.R. Choksey Integrated Financial Solutions in Mumbai. The rupee declined 5.2 percent against the dollar in the quarter, the second-worst performance among Asia’s most traded currencies.

“There is ample opportunity in infrastructure management service and HCL Tech, being a leading player, will continue to benefit from traction,” Shah wrote in a note dated Oct. 28, a week after raising his recommendation to a ‘buy’ from ‘accumulate.’

Infrastructure service contracts accounted for 27 percent of sales, compared with 7.2 percent at Infosys and 12 percent at TCS, according to data compiled by Bloomberg.

HCL Technologies runs the risk of becoming a niche service provider as dependence on this segment grows, said Harit Shah, an analyst at Mumbai-based Nirmal Bang Institutional Equities, who favors buying the stock with a one-year price target of 1,380 rupees.

Too Dependent

“The concern is that they are growing dependent on that single vertical for income,” he said. “They don’t want such a reputation in such a competitive market.”

Once the rupee starts to appreciate as economic growth rebounds from a decade-low, margins may be squeezed, said Sandip Sabharwal, chief executive officer of portfolio management at Mumbai-based Prabhudas Lilladher Pvt.

“We are advising clients to move technology stocks, including HCL, to underweight now,” he said.

DSP BlackRock Investment Managers Pvt. was among the funds that added HCL Technologies to their holdings besides UTI. Arun Rajendran, a spokesman for DSP BlackRock, declined to comment. Khurshid Mistry, a spokeswoman for UTI Asset Management, could not be reached for comment.

The gains in HCL Technologies have increased the net worth of Nadar, the sixth-richest Indian, by $2.8 billion this year to $8.7 billion, giving a boost to his philanthropic initiatives in the field of education. The Shiv Nadar Foundation, which was established in 1994, plans to spend 30 billion rupees ($479 million) over the next five years in expanding projects aimed at eradicating illiteracy and providing education to rural children.

IT Spending

Nadar, who had a rural upbringing in southern India, set up Hindustan Computers with partners in 1976 with an investment of $20,000 and now owns 62 percent of HCL Technologies. He has committed more than 10 percent to philanthropy.

His company’s success is also being fueled by an economic recovery in North America and Europe where information technology services and software spending touched $1.9 trillion in 2012, according to researcher Gartner Inc. Total IT spending may grow to $2.1 trillion in 2013, according to Gartner.

The U.S. economy expanded an annualized 2.8 percent in the third quarter at a pace faster than forecast, a Commerce Department report showed.

Cognizant Technology Solutions Corp., which pays more than a quarter of its costs in Indian rupees, on Nov. 5 forecast annual revenue would jump 20 percent, signaling improved environment for software service providers. Infosys raised its sales forecast last month for the year ending March 31.

“HCL’s results have shown a good performance and growth,” said K.K. Mital, head of portfolio management services at Globe Capital Market Ltd. in New Delhi. “We are recommending investors to hold on to HCL shares.”

Before it's here, it's on the Bloomberg Terminal.