Operational efficiencies, higher other income drive HCL Tech results

The company remains a favorite of most analysts given its robust deal kitty

Strong deal momentum, good growth by both IMS and software services businesses and healthy growth outlook for FY15 outlined HCL Technologies' results for the June 2014 quarter (Q4 for the company). While sales were largely in-line with street expectations, EBITDA margin and net profit beat estimates largely driven by higher other income. The company's revenue, EBITDA margin and net profit stood at Rs 8,424 crore (up 0.9% sequentially), 26.3% (down 40 basis points) and Rs 1,834 crore (up 12.9%). Consensus Bloomberg estimates had pegged these numbers at Rs 8,453 crore, 25.8% and Rs 1,612 crore; respectively. The sales growth was higher than that of Infosys (down 0.8% sequentially) and Wipro (down 4.4%) which continue to face growth challenges. TCS though grew its revenues at a faster clip (up 2.6%) than HCL Technologies.

HCL Technologies' management remains confident about the road ahead. Anil Chanana, CFO, HCL Technologies, says, "Our order book is robust. We remain confident of future growth as we are seeing momentum across all geographies and segments."

Both Infrastructure management services (IMS) and software services grew at a decent rate of 3.7% and 3.2% sequentially. However, IMS revenues fell short of the 5% plus sequential revenue growth witnessed over the past 7-8 quarters. Consequently, sequential revenue growth of 0.9% was the lowest over the past 8 quarters. The management though believes it is a quarterly abberation and expects improvement going forward. "We have signed big deals in last two quarters across all segments and these deals will take time to ramp up. We are not witnessing slowdown in any segment. Growth momentum is back in ALTASM, engineering and R&D services", adds Chanana. Analysts too second this view.

Sagar Rastogi, senior analyst, Technology, Ambit Capital, says, "Lower growth in IMS has contributed to the revenue slowdown. HCL Technologies has bagged a lot of large deals which will take time to ramp up. Thus, we believe growth will come back. Growth in core software services too was in line with expectations."

Unfavorable rupee movement led to EBITDA margin contraction for HCL Technologies. However, the company did well to contain the impact below analysts' expectations of 80-85 basis points due to flattish selling, general and administration expenses, improvement in utilisation rate and stable attrition levels. The company's margins were better than peers such as TCS (28.8%, down 210 basis points sequentially) Infosys (26.9%, down 140 basis points sequentially) and Wipro (22.9%, down 128 basis points). The impact was higher for peers due to wage hikes taken by them. HCL Technologies net profit growth was largely driven by 56.3% sequential jump in other income (led by treasury gains) to Rs 211 crore, lower forex losses and lower tax rate.

Most analysts remain positive on the company. Out of the 30 analysts polled by Bloomberg in July 2014 so far, 27 have a Buy, 2 have a Hold and 1 has a Sell recommendation on the stock. Their average target price stands at Rs 1,656, indicating limited upsides from current levels of Rs 1,553. At current market price, the stock trades at 16.3 times FY15 estimated earnings. This is at a near 10% premium to its immediate larger peer- Wipro which trades at 14.9 times FY15 estimated earnings. The premium is in-line with the consistent and superior performance posted by HCL Technologies relative to Wipro. Analysts expect this premium to sustain going forward as well atleast till the divergence in financial performance of the two companies reduces.