HCL misses estimates, disappoints markets

Management positive on future growth

HCL Technologies, the fourth-largest information technology (IT) services provider, followed in the footsteps of Tata Consultancy Services in disappointing the markets by missing the estimates for the January-March quarter. The company's financial year ends in June.

Currency headwinds, higher investments, foreign exchange losses and completion of a major client engagement in the retail and consumer packaged goods vertical weighed on the March quarter's performance.

The management, however, sounded positive on future growth.

HCL Technologies reported a net profit of Rs 1,683 crore, up 3.6 per cent from Rs 1,624 crore in the same quarter a year ago. On a sequential basis, the profit slipped 12.2 per cent.

Revenue for the quarter at Rs 9,267 crore was up 11 per cent, from Rs 8,349 crore a year ago, but down 0.2 per cent sequentially. In dollar terms, the revenue was flat sequentially.

By Bloomberg consensus estimates, revenues were expected at Rs 9,384 crore and net profit at Rs 1,821 crore for the quarter.

"HCL Technologies reported a comprehensive miss to our/consensus expectations. The revenue growth momentum retracted to deceleration after witnessing a slight acceleration in the previous quarter. We continue to believe increased competition in information management system, pressure on margins, and mean reversion in free cash flow conversion will weigh on the stock price in the near term. We repeat our cautious stance and revise the target price to Rs 970 (from Rs 1,050)," says Shashi Bhusan of Prabhudas Lilladher.

The bigger disappointment for the quarter was the slip in margins. Operating margins slipped to 21.3 per cent, the lowest in the last seven quarters. Margins were hit by 63 basis points (bps) due to currency and 40 bps due to wage rises.

While the market was factoring in that margins would be under pressure, but a 250-bp decline sequentially was a surprise.

"In-line with our expectation, HCLT is witnessing pressure on margin on account of investments in business, and hiring workforce. We expect sustained pressure on margin as HCL Tech enters next phase of investments over next 12-18 months," says Bhusan of Prabhudas Lilladher.

The company's stock took the hit which was down almost 10 per cent during intra-day trading. However post the management commentary the stock corrected and closed at R 891 per share down 3.48 per cent from the previous close.

"The robust growth is reflective of our resilient business model in a volatile currency environment besides our continuous wins in the focus areas. The operating margin metrics and enhanced working capital requirements have impacted our cash flows and are an outcome of our focused investment agenda for enhancing capability build up and delivery dynamics of large engagements," said Anil Chanana, CFO, HCL Technologies.

"We gained significant market share fuelled by transformational deal bookings in excess of $1 billion. These engagements were primarily driven from industries like Consumer Services, Manufacturing and Public Services and the European region", said Anant Gupta, President & CEO, HCL Technologies.

Analysts pointed out that the firms trail blazing performance in the infrastructure management services (IMS) in the last few quarters seems to be slowing down. For the quarter, IMS grew 3.1 per cent in constant currency, on a reported basis the growth was just about 0.3 per cent. Within the application services segment the enterprise systems integration degrew by 5.4 per cent (constant currency). Growth was primarily driven by Business Services (the BPO operations) and engineering and R&D services representing growth of 7.9 per cent and 4.6 per cent, respectively.

"These results are a mixed bag - while on the positive side, the overt reliance on IMS is slowly expected to reduce over time, and increasing exposure to Europe is a worry since the geo remains volatile. This has been a tough quarter for nearly everyone in the industry, but the HCL results is a classic case of the dark cloud with a silver lining," said Sanchit Vir Gogia, chief analyst and group CEO, Greyhound Research.

The quarter also saw the company hiring a higher number of employees. It added 11,041 (gross addition) employees during the quarter. Attrition for the quarter was 16.2 per cent (IT services) and 8.3 per cent (Business services). Utilisation at 81.9 per cent was down from 82.9 per cent during the last quarter.