HCL Technologies: Growth troubles

Company reported constant revenue growth of just 1.5% and growth from major market also remained soft

India's fourth largest IT services provider HCL Technologies stock hit a day's low as its share fell almost 3% on its tepid July-September quarter numbers. While the stock has recovered, question remains on the growth prospects of the company.

A look at some of the parameters show that the first quarter for HCL Technologies could well be one of the weakest in the last few quarters.

For instance, the company reported constant revenue growth of just 1.5%, one of the lowest when compared to TCS' 3.9% and Infosys 5.9%. On reported terms basis, HCL's US dollar revenue grew by a mere 0.5% on a sequential basis, where as TCS and Infosys reported growth of 3% and 6% respectively.

This is not all. Growth from major market also remained soft. HCL reported that North America grew by 0.7% (constant currency), compare this to 5.1% the company reported in the quarter ended June 30, 2015. HCL Tech had cautioned about the growth numbers for the first quarter as it had client specific issues. But a flat growth in a traditionally strong quarter is unexpected.

But the more worrisome aspect for growth drivers is the infrastructure management services, which for the third consecutive quarter has been slow. On a constant currency basis infrastructure services grew 0.9%, lowest growth when compared to the last three quarters. Infrastructure management services contributes 35% to the company's revenue base.

An analyst on condition of anonimity said, "We continue to expect weak growth in IMS service line due to sluggish deal wins and increasing competitive intensity. Growth in software services (60% of revenues) is also not encouraging enough despite management positive on it. At best, around 25% of its revenues which come from Engg R&D services (19% of revenues, grew by ~23% in FY15) and BPO (~5%, growing at 21%+ in last 2 years), are expected to be the only growth drivers for the company going ahead."

HCL Technologies while had acknowledged that some of the clients are going through transition, it is also a fact that competition in IMS has increased. Players such as Infosys and Wipro have been aggressive in getting IMS deals.

"This quarter numbers are not too disappointing. They had pre-warned the street. The positives that I see are the margins and the order book position. The order book position is strong and the company said its higher by 10% and the commentary of the management matches that of the other two large players," said Sarabjit Kaur Nangra, VP-research analyst-IT, Angel Broking.