COMPANY WATCH: HCL TECHNOLOGIES

•  HCL Wins $330 Million Outsourcing Contract from DSG International
•  The Largest Outsourcing Deal for any Indian IT Services Company
•  Second Quarter Results in Line With Expectations, Improved Business Pipeline
•  nfrastructure Services grew by 21.3% QoQ, But BPO Segment Stagnant

The largest Outsourcing Deal for India:

HCL Technologies, the fifth largest IT services company of India, recently announced a multi-year, multi-service, co-sourcing deal to provide system development, application delivery, infrastructure support and maintenance services to the IS function of DSG international Plc, the top UK consumer-electronics retailer formerly known as Dixons Group. DSG group owns the brands such as Dixons, Currys, PC World and The Link. Though HCL Technologies has not confirmed the deal size, it has confirmed it to be the largest outsourcing deal for India so far, outstripping the $250m deal signed by Tata Consultancy Services with ABN Amro last year. Market analysts estimate the deal size at $330 million (Rs. 1500 crore). HCL had to compete with a large UK-based IT services vendor and a prominent US player also to win the deal.

Under this agreement, HCL Technologies will manage the majority of the IT infrastructure of DSG International. The five-year deal with HCL Technologies begins in February 2005 and will cover system development, application delivery, infrastructure support and maintenance for the DSG group in the UK and Ireland. An estimated 350 of DSG IT workers will also be transferred to HCL as part of the agreement. Since HCL is absorbing the internal team of DSG maintaining its infrastructure till now, it won’t have to sub-contract services such as break/fix repairs and onsite support to other suppliers. HCL will be providing support from its site at Noida, the industrial suburb near New Delhi, which will link to an operations group in the UK. In the next one year, HCL will gradually shift to an offshore delivery model managing 60% of the project from offshore locations, while the remaining 40% will be delivered onsite.

HCL Technologies: Fifth in Rank, but High Strength in Infrastructure Management Services

HCL Technologies, the fifth largest IT Services company of India, is strongly placed in the emerging infrastructure management services space, where it offers data center, helpdesk, network, and security management services. For the twelve-month period ended 31 December 2005, HCL Technologies, along with its subsidiaries, had revenue of $864 million (Rs 3,890 crore) and employed 28,182 professionals. HCL runs some 45,000 non-desktop devices for its clients, including 50,000 network devices and 15,000 security devices. Company's infrastructure includes a network of 26 offices in 15 countries to deliver solutions across select verticals including Banking, Insurance, Retail & Consumer, Aerospace, Automotive, Semiconductors, Telecom and Life Sciences.

Thrust on Large Deals:

HCL Technologies has tried to consolidate it position through large deals with a good success rate, as it has signed a number of multi-year multi service deals recently.

• A Fortune 500 supplier of industrial automation equipment and services in its Global Transformation Project (GTP) has selected HCL Technologies as the IT partner. HCL will set up an Application Optimization & SAP Implementation Centre of Excellence that will work with the client across locations in achieving this transformation over four years. HCL claims that the project is amongst the biggest transformation projects of its kind.

• It has signed a multi-year and multi-million-dollar deal with a Fortune 1000 logistics & transportation company for worldwide application development and management.

• HCL entered into $100 million strategic agreement with EXA Corporation, a joint venture in system integration area between IBM Japan and Japan's second largest steel manufacturer JFE Steel, to provide offshore based IT solutions and system integration services to EXA’s blue-chip customer base. This is the first partnership of such a large scale between a Japanese system integrator and an Indian offshore vendor.

• HCL became the first India-based design house validated as ‘Ready for IBM Technology’. The ‘Ready for IBM Technology’ mark identifies solutions that have been pre-tested and validated for compatibility with IBM Microelectronics products and services by the solution developers. Under this program, HCL will design and carry out the silicon-level implementation of advanced integrated circuits (ICs) for manufacturing in IBM’s state of-the art wafer foundries.

Focused Approach has Delivered the Results:

Financial Highlights for the 2nd Quarter Ending December 2005:

The second quarter results were broadly in line with the market expectations but the company didn't come with a spectacular performance. It is believed that the large deal wins and the improved business pipeline particularly in BPO segment would be reflected in the coming quarters only.

•  Gross revenue of $234 million up 6.2% QoQ & 27% YoY

•  Net income of $40.23 million up 5.7% QoQ & 35.4% YoY

•  Gross margin in Q2 expanded to 37.7% from 37.3% in Q1

•  EBIDTA margin in Q2 improved to 22.5% from 22.2% in Q1

•  Net addition of 1,562 employees in the BPO segment

•  Net employee additions of just 85 in the software services business was a cause of concern

Consolidated Income Statement (as per US GAAP):

Second Quarter Results Analysis based on the unaudited US GAAP financial results (figures in $ million) for Q2 Full Year 2005-06:

Segment-wise Break-up:

•  Software services that contributed 75.9% of revenues in second quarter of FY'06 grew 7.6% quarter-on-quarter (Q0Q) and 27.3% year-on-year (YoY).

•  BPO segment contributing 12.7% of revenue was almost flat with a growth of just 0.1% QoQ and 18.1% YoY.

•  Infrastructure services grew 21.3% QoQ and 74.1% YoY, but the absolute contribution to the growth of total revenue was limited, as this segment contributed only 11.4% of the revenue.