Wishing You a Joyous Dussehra! Celebrate the victory of good decisions in your financial journey! 
Wishing You a Joyous Dussehra! Celebrate the victory of good decisions in your financial journey!
SEBI Registered: Research Analyst | Investment Adviser | Call: +91 97730 15000 | Email: research@stockaxis.com
November 12, 2024
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Trump's reintroduction of the 'Make in America' plan, focused on reshoring manufacturing, could have significant repercussions for Indian exports. If tariffs on Chinese goods increase, Indian products like textiles, machinery, and steel, which are competitive with Chinese imports, may face disruptions. India’s manufacturing processes could be affected, particularly in sectors where it has a strong foothold. Additionally, a weak Chinese economy could lead to increased dumping, further complicating India’s export landscape. Moreover, Trump's proposed tax cuts and tariff barriers risk reigniting inflation in the US, which could strain the Federal Reserve’s ability to keep interest rates low. This could worsen the US fiscal deficit and trigger higher interest rates, negatively impacting emerging economies like India through reduced capital inflows and currency depreciation.
October saw a significant market correction, driven by heavy selling from foreign portfolio investors, weak earnings, and high valuations. The current earnings season has been disappointing, with a noticeable decline in urban consumption and industrial demand, impacted by the heavy monsoons. However, we view these factors as temporary and expect demand to recover in the coming months, especially with the festive season boosting consumption. While export growth has been sluggish, domestic demand remains strong. India's robust foreign exchange reserves and stable fiscal position are key strengths, and the US focus on fossil fuels should help stabilize oil prices. Moreover, India's positioning as an alternative to China will support long-term growth. We believe these strengths will eventually reflect in the market, and this downturn will pass.
In this month’s newsletter, we discuss some topics that intrigue us and are worth a long read. We will be covering the following topics in this month’s newsletter:
So, lets dive in.
HCLTech is India’s third-largest IT company by market capitalization and revenues, with a presence in over 60 countries. Founded in 1991 by renowned industrialist and philanthropist Mr. Shiv Nadar, the company is a diversified global technology company based out of Noida.
HCL Technologies delivered a beat on its Q2 results this year, surpassing the street estimates. In this article, we take a deep dive and discuss what’s working for the company, why we like it, its future outlook, and more.
HCLTech operates in a vast addressable market pool, mainly spread across the following markets:
IT Services (BPO market): This market accounted for 7.5% of India’s GDP in 2023 (amounting to ~$268bn or ~22.68 lakh crore). The IT services - BPO industry has been pivotal in propelling India’s GDP growth over the last few decades, by outperforming the economy consistently over time.
India’s growing reputation as the preferred destination for Global Capability Centres (GCCs) by MNCs has significantly boosted software and business services exports. India's share in digitally delivered services exports globally increased to 6.0 percent in 2023 from 4.4 percent in 2019.
Software: The Indian software services export market is estimated to be valued at ~$151.6bn in 2024. The global SaaS (Software as a Service) market is estimated at $273.5bn in 2023. The SaaS and Cloud services markets are the high-growth areas within the software space.
ER&D market: As discussed in one of our previous articles on ER&D, please click here to read about the size of the Indian ER&D industry.
We compared HCLTECH with similar-sized IT companies, namely TCS, Infosys, Tech Mahindra, and WIPRO. We have left out LTIMindtree owing to a lack of comparability due to the Mindtree acquisition and integration. The data from the analysis is as follows:
| Particulars (Rs Cr) | HCLTech | TCS | Infosys | Tech Mahindra | WIPRO | |||||
|---|---|---|---|---|---|---|---|---|---|---|
| Revenue | PBT | Revenue | PBT | Revenue | PBT | Revenue | PBT | Revenue | PBT | |
| FY19 | 60,427 | 12,622 | 1,46,463 | 41,563 | 82,675 | 21,041 | 34,742 | 5,543 | 59,019 | 11,542 |
| FY20 | 70,676 | 13,980 | 1,56,949 | 42,248 | 90,791 | 22,007 | 36,868 | 5,058 | 61,138 | 12,252 |
| FY21 | 75,379 | 15,853 | 1,64,177 | 43,760 | 1,00,472 | 26,628 | 37,855 | 5,953 | 61,935 | 13,903 |
| FY22 | 85,651 | 16,951 | 1,91,754 | 51,687 | 1,21,641 | 30,110 | 44,646 | 7,452 | 79,312 | 15,141 |
| FY23 | 1,01,456 | 19,488 | 2,25,458 | 56,907 | 1,46,767 | 33,322 | 53,290 | 6,446 | 90,488 | 14,766 |
| FY24 | 1,09,913 | 20,967 | 2,40,893 | 61,997 | 1,53,670 | 35,988 | 51,996 | 3,224 | 89,760 | 14,721 |
| CAGR | 13% | 11% | 10% | 8% | 13% | 11% | 8% | -10% | 9% | 5% |
Source: Company Filings, stockaxis Research
Profit margins of HCLTECH remains above industry average, but there is also a significant gap in the margins of TCS & INFY vs HCLTECH.
HCLTech derives its revenues from 3 primary segments, namely:
Revenue mix adjusted for inter-segment revenue
ITBS delivers digital solutions in applications, AI, cloud, infrastructure, and digital operations to meet global enterprise needs, that enable significant transformations for businesses.
This sub-segment of the Services vertical offers services like Digital consulting, application management and services etc. With over 152 patents, 75 solution offerings, 36 partnerships/collaborations, and over 400+ clients, the digital services vertical is rapidly changing the way businesses are run.
GenAI is one of the critical components of the digital transformation services offered by HCLTech.
Under Digital Foundation services (DFS), HCL offers Hybrid and Multicloud Services, Digital Workplace Services, network services (SDWAN & 5G upgrades & maintenance), Cybersecurity Services, Unified Service Management and Intelligent Operations.
The image on the right shows some of the prominent partners of HCLTech in the Digital services ecosystem.
As the name suggests, “Digital Process operations” aims to optimize the speed, agility, and efficiency of business processes and customer experiences. This also uses the above-mentioned technologies to help their clients.
Source: HCL Technologies FY2024 Annual Report
HCLTECH’s BFSI business has not only delivered industry-leading growth in FY24, going into FY25 but has also defied the overall IT industry slowdown during the same period.
HCLSoftware offers software products and cloud-based solutions across Total Experience (TX), Business Applications and Industry Software, Data and Analytics (Actian), Intelligent Operations (IO), and Security and Compliance, along with a bucket of Specialized Products, to make organizations more competitive while providing strategic insights and technologies needed to succeed in an increasingly hyperconnected world. It caters to 65 of the Fortune 100 and 220 Fortune 500 companies worldwide.
Q3FY25 should deliver a healthy performance, owing to seasonality.
We discuss this vertical later in the article.
The table above shows the number of clients based on the deal value in US$. A healthy deal-win momentum was witnessed across buckets in Q2FY25.
The cloud is a network of remote servers that store, manage, and process data over the Internet, allowing users to access and use applications and services without needing physical infrastructure.
Key applications under CloudSMART
GenAI refers to artificial intelligence systems that can create new content, such as text, images, or music, based on patterns learned from large datasets.
HCL technologies offer a comprehensive stack of AI solutions - across a wide spectrum of business applications, right from Ideation – to Engineering – to Scaling.
Source: HCL Technologies FY2024 Annual Report
HCLTech offers ER&D solutions to clients across industries like ISVs, consumer electronics, semiconductors, telecom and networking, medical, manufacturing, and transportation.
The outlook for this vertical is promising, specifically for automotive ER&D, especially after the acquisition of German automotive engineering services company ASAP Group for $279.2mn (~INR 2,295cr) in July 2023. ASAP group works with 63 of the top 100 global engineering R&D spenders. The acquisition will enable HCLTECH to become an important stakeholder in the technology transition underway in the automotive space globally.
HCLTech has existing partnerships/collaborations with companies like Intel Foundry, Arm Holdings Plc., and CAST for semiconductor design and development.
Last month, the Foxconn Group announced a JV with HCL Technologies for an OSAT facility in India, mostly in the UP. The JV is in the works and more updates should flow in soon. The JV is with HCLTech’s promoter company Vama Sundari Investments, but there will be definite adjacency benefits that will flow through into HCL Technologies.
| Particulars (Rs Cr) | HCLTech | TCS | Infosys | Tech Mahindra | WIPRO | |||||
|---|---|---|---|---|---|---|---|---|---|---|
| Revenue | PBT | Revenue | PBT | Revenue | PBT | Revenue | PBT | Revenue | PBT | |
| FY19 | 60,427 | 12,622 | 1,46,463 | 41,563 | 82,675 | 21,041 | 34,742 | 5,543 | 59,019 | 11,542 |
| FY20 | 70,676 | 13,980 | 1,56,949 | 42,248 | 90,791 | 22,007 | 36,868 | 5,058 | 61,138 | 12,252 |
| FY21 | 75,379 | 15,853 | 1,64,177 | 43,760 | 1,00,472 | 26,628 | 37,855 | 5,953 | 61,935 | 13,903 |
| FY22 | 85,651 | 16,951 | 1,91,754 | 51,687 | 1,21,641 | 30,110 | 44,646 | 7,452 | 79,312 | 15,141 |
| FY23 | 1,01,456 | 19,488 | 2,25,458 | 56,907 | 1,46,767 | 33,322 | 53,290 | 6,446 | 90,488 | 14,766 |
| FY24 | 1,09,913 | 20,967 | 2,40,893 | 61,997 | 1,53,670 | 35,988 | 51,996 | 3,224 | 89,760 | 14,721 |
| CAGR | 13% | 11% | 10% | 8% | 13% | 11% | 8% | -10% | 9% | 5% |
Source: Company Filings, stockaxis Research
Strategic partnerships/collaborations with “top-tier” OEMs, IP owners, software vendors, Cloud Service providers, Enterprise application providers, Open-source model providers, Full-stack LLM developers, etc.
The “Joint-go-to-market” model across geographies and industries has worked very well for HCLTech.
| Particulars | 10Y Median Mcap/Sales | All-time Median Mcap/Sales | Present Mcap/Sales | %Premium over historical multiples |
|---|---|---|---|---|
| TCS | 5.4 | 5.3 | 6 | 12% |
| INFY | 4.2 | 4.4 | 4.8 | 12% |
| HCLTECH | 3.0 | 2.7 | 4.4 | 54% |
| TECHM | 2.1 | 2.1 | 3.1 | 48% |
| WIPRO | 2.6 | 2.8 | 3.4 | 26% |
| LTIM | 3.9 | 3.9 | 4.8 | 23% |
| Average | 3.5 | 3.5 | 4.4 | 25% |
When it comes to the Market Capitalization/Sales ratio, HCLTECH beats its peers on 3 fronts:
HCLTECH warrants such a premium due to its:
(Global partners in the cloud business)
On the PE ratio front, HCLTECH is in line with the industry averages, trading at a PE of ~30x vs the industry average of 34x and a median of 30x.
The Company upped its revenue growth guidance to 3.5% - 5.0% YoY in CC (3-5 guided earlier). EBIT margin is guided to be between 18.0% – 19.0%. Given its core fundamentals and a strong track record of delivering industry-leading growth, we believe HCLTech will continue to take the lead in emerging and existing initiatives in the IT industry and will thus drive long-term value for its stakeholders.
Mr. Shiv Nadar, founder of HCLTech emerged as India’s leading philanthropist donating Rs. 2,153cr in FY2024, averaging 5.9cr per day. The 79-year-old mainly donates to education and technological endeavors through the Shiv Nadar Foundation. He has topped the EdelGive Hurun India Philanthropy List 3 times in the past 5 years.
Fostering Capitalism with a Heart
Did you know that the Tata Group is over 156 years old?
That is quite a long time indeed. The fact that the Tatas are one of the few business houses to have been around for so long is a feat in itself. It also speaks volumes about the core values and principles that the Tata Group is built on.
With a combined market capitalization of over ~INR 33 lakh crore or ~$400bn and revenues of ~$165bn in FY24, the group has grown multi-fold, especially post Mr. Ratan Tata’s ascendancy as Group Chairman.
The Tata Group has compounded its business at a CAGR of ~17% over the last two decades. (Source: Business Today)
In this article, we revisit the illustrious legacy of the Tatas, and what really made them so special. The Tatas are a role model to anyone and everyone aspiring to pursue “capitalism with a heart.”
The Tata group has had 7 chairmen over its 156-year-long tenure, which are as follows:
| Name | Tenure |
|---|---|
| Jamsetji Tata | 1868–1904 |
| Sir Dorabji Tata | 1904–1932 |
| Nowroji Saklatwala | 1932–1938 |
| J. R. D. Tata | 1938–1991 |
| Ratan Tata | 1991–2012, 2016–2017 |
| Cyrus Mistry | 2012–2016 |
| Natarajan Chandrasekaran | 2017–present |
Source: Jagran Josh
The above-mentioned leaders imbibed the Tata values and principles across their businesses. Mr. Ratan Tata was merely following the qualities instilled in the group culture.
Dorabji and JRD Tata had faced tough times, where setting up businesses took humongous efforts. However, Mr. Ratan Tata was able to take these efforts and propel the group to new heights, driven by his able leadership and the tailwinds like the Indian economy opening post the 1990s. Surprisingly, his ascendance as Chairman of the Tata Sons coincided with the year of liberalization of the Indian economy.
Each of the above leaders had their own legacy and leadership styles, and their contributions to Indian society, polity, and economy are invaluable.
The current Chairman, Mr. N Chandrasekaran has spent over 30 years at TCS and now strives to take the Tata legacy forward.
Sir Jamshedji Nusserwanji Tata
Sir Dorabji Tata
Mr. N Chandrasekaran
The Tatas were responsible for setting up several “firsts” for India:
One can imagine the kind of expertise, planning, confidence, determination, and conviction that would have been required to set up these projects when no one else has done it before.
The stories of how Tata Steel was built and how & Tata Indica was born in India are truly inspirational.
The Tatas have witnessed India and the world through different phases of its evolution. Be it World War 2, the British Rule in India, or the rise and fall of several governments, the Tatas have witnessed the successes, failures, growth and pessimism, the struggle and the serenity that India was synonymous with over these years.
From India’s first Prime Minister, Jawaharlal Nehru, to our current Prime Minister, Shri Narendra Modi, the Tatas have not only contributed to national progress but have also been key advisors to the government on shaping economic and social policy for our country.
The path was not easy, with a lot of struggles on the way. Jamsetji, JRD, and the succeeding leaders of the Tata stable had struggled for decades with the License Raj, the governments’ socialist stance on the industry, and the constant controls on companies, such as nationalization, forced shut-downs, mergers, and spin-offs without consulting the business owners. Words cannot express the pain felt by the Tatas at the time when their dream projects like Air India were nationalized and JRD was removed as Chairman from the board. A few other companies like New India Assurance were also nationalized. At one point, the government had come to a decision to merge Tata Steel with other steel companies and make it a public sector entity (This proposal was later withdrawn). Years of work were at stake, yet the Tatas never lost their grit and persevered, hoping for better times to come.
Leaders, like JRD Tata, criticized government policies on numerous occasions, but he never allowed himself to be bitter about it. Mr. Ratan Tata quoted in an interview that, “his (JRD’s) love for the nation was far larger, so he took all of that in stride”.
There were several instances of union strikes & political upheavals at Tata Motors, and Tata Steel, that disrupted business, such as the shifting of the shifting the entire Tata Nano plant from Singur, West Bengal to Sanand, Gujarat. But all of those were handled with impeccable maturity and eventually subsided over time.
Mr. Ratan Tata took his last breath on the 9th of October 2024, at the age of 86, leaving behind a sparkling legacy and impeccable goodwill. Not only India, but several people across the globe mourned the death of this renowned industrialist.
Integrity – the word by which Mr. Tata lived by, was seen in his actions throughout his career.
Some of the landmark events that marked his tenure as chairman were:
People across the board, all over the world, feel a sense of association with the Tatas. Why so?
N. Chandrasekaran, the current Chairman of the Tata Group has announced a capex outlay of over $90bn over the next five years across its businesses, including EV, batteries, 5G electronics, and semiconductors.
| Company | Committed Capex |
|---|---|
| Tata Power | $10bn |
| Tata Steel | $10bn |
| Tata Motors & JLR | $25bn |
Source: Business Today
The table above shows the committed capex for a few of the Tata Group companies, over the next 5 years.
Going forward, the group’s high-performing businesses like TCS, Tata Motors, Titan, Trent, Indian Hotels, and Tata Steel will continue to generate substantial profits for it.
Air India, which has struggled for over a century now, is undergoing pivotal changes. Vistara, a joint venture between Tata Group and Singapore Airlines, is set to merge with Air India in November 2024. Air India Express completed the merger of AIX Connect, formerly AirAsia India, with itself this month.
Disclaimer: Several excerpts in this article have been taken from the book: The TATAs – How a Family Built a Business and a Nation. We would like to give the credit for the same to its respected author, Mr. Girish Kuber.
Not one or two, but the entire PSU banks space has reported outstanding numbers in Q2FY25, surpassing analyst estimates. Such an impressive set of numbers has once again surprised the pessimists of PSU banking.
We analyzed several metrics for PSU and Private Bank groups for QF2Y25, Q2FY24, and Q1FY25, the data for which is tabulated below:
| Particulars | Advances Growth | Deposits Growth | PAT growth | Avg P/B | ||||
|---|---|---|---|---|---|---|---|---|
| %YoY | %QoQ | %YoY | %QoQ | %YoY | %QoQ | |||
| Pvt Banks | 4% | 25% | 4% | 26% | -12% | 9% | 1.67 | |
| PSU Banks | 3% | 16% | 3% | 11% | 14% | 45% | 1.51 | |
Source: Company Filings, stockaxis Research
Given the current uptick in profitability for the PSU Banks, they may provide valuation comfort to investors looking to invest from a medium to long-term horizon. There is also room to consider companies within the PSU Bank space that may trade around its sector average and have significant PAT growth visibility over the next 3-4 years.
However, PSU banks are increasingly gaining favor owing to the growth coming from a low base, and other structural improvements in the balance sheets across the Indian banking space.
Indian banks are currently enjoying their strongest balance sheets in over a decade, marked by considerable improvements in asset quality, provision buffers, and adequate capitalization of their balance sheets.
The top three PSBs have performed even better in Q2:
| Particulars | Advances Growth | Deposits Growth | PAT growth | |||
|---|---|---|---|---|---|---|
| %YoY | %QoQ | %YoY | %QoQ | %YoY | %QoQ | |
| State Bank of India | 3% | 15% | 4% | 9% | 3% | 23% |
| Bank Of Baroda | 7% | 12% | 4% | 9% | 19% | 26% |
| Punjab National Bank | 4% | 15% | 4% | 11% | 19% | 151% |
Source: Company Filings, stockaxis Research
Another evidence that the outperformance may be sector-wide is that the top 3 PSU banks have also shown similar outperformance vis-à-vis the top 3 private banks. The top 3 private banks grew their profits by 12%YoY and 18% QoQ, as compared to the growth rates of the PSU banks as seen in the table above.
PNB’s recovery has been quite interesting, as it delivered its highest-ever PAT in FY24. PNB's gross NPA ratio improved to Rs 4.48 percent at the end of September, from 4.98 percent at the end of June. Net NPA ratio too improved to 0.48 percent from 0.6 percent in the preceding quarter. New provisions and contingencies fell to just Rs. 288cr from Rs. 3,444cr, thus boosting its PAT. The lender’s RoA jumped to 1.02% vs 0.46% in the same quarter last year.
Historically, the private banks have traded at a premium to PSU banks.
However, there is a definite case for the gap narrowing in the near future, owing to:
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