HCL Tech:

IT space is the sector where we are witnessing flat growth in its earnings in dollar terms. The competition is tough and developed countries economies are facing jitters. But nothing stays permanent and should not matter as long as management understands the 5 forces of Porters.

HCL Tech reported its first quarter revenues up by 15% and -3% net profits compare to quarter last year in Indian rupees. In the last 3 years most of the IT businesses had given around 100% returns and two-three weeks back what management came out with their forecast tells us that they will face a pressure for next two or three quarters.

If we look at Porters five forces:

    1. Threat of New entrant: New entrant increases competition but threat of new entrant is dependent on the barrier to entry. It is easy to open a pizza shop but to replicate HCL Tech business will take a long time.
    2. Power of Suppliers: suppliers can place pressure on margins. In HCL Tech situation there are no suppliers but out sourcing employees or salaries of its employee and retaining them in the business is ongoing situation.
    3. Availability of substitutes: in the HCL Tech business, if they are not creating new knowledge and are not up to date with the new technology and trends in the market then client look for substitutes or considers to take business somewhere else.
    4. Power of customers: in a competitive market where there is little product differentiation customers have power to dictate the pricing and also to switch the suppliers. In HCL Tech business it is possible but not easy for the customer to switch. More than 90% of revenues IT business generate is from its retained clients rather than new customers.
    5. Existing competition: there is always a threat from your competitors who are in the business of the same scale and that can erode profit margins. Innovation and developing new knowledge and investment in R&D differentiate from competitors. This is the reason all the big IT businesses are sitting on massive cash to grab the opportunities available in the market.

From valuation perspective I still think HCL Tech is trading at discount and we hold this business in our portfolio. We are not personal advisers so if you are planning to buy HCL Tech after reading this blog please take professional advice.