HCL joins rising IT tide on weak rupee, higher efficiency

Net profit up 64% & revenues 31.2% y-o-y; volume growth disappoints

In line with the robust earnings announced by larger peers Infosys and Tata Consultancy Services (TCS), HCL Technologies on Thursday announced a 63.8 per cent jump in net profit for the three months ended September at Rs 1,416 crore, against the year-ago period. Revenues were up 31.2 per cent at Rs 7,961 crore, compared to the September quarter of the previous financial year.

The company follows a July-June financial year and the September quarter is the first quarter of its financial year.

Sequentially (that is, compared with the trailing quarter), HCL Tech’s net profit was up 18.7 per cent, while revenues increased 14 per cent. However, the volume growth (in billed man-hours in a quarter) came at 3.6 per cent, almost half of TCS’ 7.3 per cent and close to Infosys’ 3.1 per cent. In the previous quarter as well, the company had reported a volume growth at 3.9 per cent, lagging TCS and even Infosys, which has been trying to put its house in order.

HCL’s stock fell 6.6 per cent on the BSE exchange to close at Rs 1,083.15 on Thursday. Most of the gains for HCL Tech in terms of profit margin were contributed by a favourable currency that prompted analysts to remark that while the company’s net profit numbers are above expectations, its revenue growth has been “not-so-good” especially at a time when its larger and smaller peers are upbeat about demand returning to the industry.

Moreover, the infrastructure management services (IMS) business continued to fuel the company growth, expanding by 42.2 per cent year-on-year (YoY) prompting experts to remark that HCL Tech is relying too much on this business which is gives lower margin compared to several other business lines.For HCL, growth was led by the Americas region, which grew four per cent, while Europe expanded one per cent in constant currency terms and by financial services and the manufacturing verticals.

The company announced a dividend of Rs 2 a share.

According to Anant Gupta, president and chief executive, the company booked deals worth $1 billion during the quarter, which included nine transformational deals. The IMS business continued to fuel the company growth, expanding by 42.2 per cent year-on-year (y-o-y). Gupta said the company would continue to focus on the business line as infrastructure outsourcing space as it is “under-penetrated” and there are several opportunities for “convergence” in the future.

“HCL continues to strengthen its position in the momentum markets of the industry, with Europe crossing a milestone run rate of $1.5 billion reflecting a very healthy 23.6 per cent growth y-o-y.”

Dhananjay Sinha, head (research) and strategist at Emkay Global Financial Services, said, “Growth continues to be led by IMS for HCL Tech as has been the case through the past several quarters (IMS accounts for 80 per cent of incremental revenue addition during the quarter) with Core software remaining soft.” Sinha added, “The surprise in margins at HCL Tech continues.”

Last week, Infosys, once considered the sector bellwether, surprised the market by raising the lower end of its revenue outlook, saying it would grow at least by nine per cent in the current financial year, backed by higher demand and a renewed momentum after the return of its co-founder N R Narayana Murthy in June. TCS grew its net profit by 33.9 per cent to Rs 4,702 crore on a yearly basis in line with a strong show in recent times. The revenues, backed by some strong deals and broad-based growth, surged 34.3 per cent to Rs 20,977.24 crore on a y-o-y- basis.

Anil Chanana, chief financial officer of HCL Technologies, said the company also planned to consolidate facilities across 16-17 locations to free up over 30,000 seats, which will lead to operational efficiencies in the future. “With our layered hedging policy in place, we have been successful in delivering a net margin of 17.8% for this quarter, this being the eight straight quarter of net margin expansion. This was supported by healthy free cash flow to Ebitda conversion of 75% (on last 12 months basis). We maintain our focus on shareholder value creation, and our return on equity remained at a high of 34%,” he added.

 

The company’s employee strength stood at 87,196 employees at the end of the September quarter, while attrition increased to around 16% during the quarter.