HCL Tech: Broadbased growth drives revenues in Q4

Margins slip below guided levels, as pricing pressure persists

Growth is not an issue for HCL Technologies. In the quarter ended June 2015 (fourth quarter for the company), the company reported a 3.2 per cent sequential growth in dollar revenues and a 2.9 per cent growth in constant currency.

HCL Tech's Chief Financial Officer Anil Chanana says new clients have contributed to the revenue growth during the year. New clients accounted for 7.1 per cent of total revenues during the year, which is nearly double of last year’s 3.6 per cent. During the financial year, HCL Tech signed 57 transformational deals with more than $5 billion in total contract value.

During the quarter, it added one client in $100 million-plus category and five clients in $40million-plus bucket. The pipeline remains strong, thanks to increased momentum in large deal signings in ITO and Engineering and R&D services. The company has signed 47 new clients in the $1-million bucket, which is reflective of its increased participation in engagements in digitalisation and modern apps. The growth is broad-based across verticals and geographies. The best performing verticals during the quarter were health care, (accounts for 12 per cent of sales) and retail and CPG (nine per cent of sales). Telecommunications, media, publishing and entertainment have also contributed to the quarter’s revenue growth, and sequentially these verticals reported growth between seven to 10 per cent.

The disappointment, however, came on the margin front. HCL Tech's operating margin came in below its guided band of 21-22 per cent.  Emkay Global says the Ebit (earnings before interest and tax) margins slipping to 20.2 per cent is a negative surprise. The margin performance is disappointing in the wake of slight currency depreciation and absence of wage hikes, which tends to hit margins for the IT services pack. What this indicates is that margins would come under pressure across the sector and HCL Tech’s results also reflect that trend.

Higher costs and increase in the share of onsite employees resulted in some margin erosion. The company has increased head count by 14,500 in the quarter, a third of it being onsite. Nearly 2,900 resources were hired from customers. While the move would put pressure on margins, HCL Tech is targeting to maintain margins in the 21-22 per cent range.

In the past, one of the risks was revenue concentration in the infrastructure management services. However, HCL Tech is a lot more diversified today and engineering services accounts for $1 billion in revenues, while infrastructure accounts for $2 billion.