Five takeaways from HCL Technologies numbers

Despite a better-than-expected performance, markets punished HCL Technologies’ stock that lost nearly 3% in intra-day deals as compared to the benchmark indices that lost around 0.7%. The company clocked-in a net profit of Rs 1,834 crore against an expectation of Rs 1,611 crore in the recently concluded quarter.

What the profit numbers do not reflect, however, is the huge order wins by the company during the quarter. HCL Tech’s contract value of booking exceeded $5 billion for the year ended June 2014, which included a $500 million order from PepsiCo and a $400 million contract from DNB Bank Norway.

Following are five takeaways from the numbers:

1. Despite beating expectations at the PAT (profit after tax) level, it disappointed the market on the revenue front. In rupee terms, revenue increased by 0.9% quarter-on-quarter (q-o-q) at Rs 8,424 crore. In dollar terms, the revenue grew 3.4% sequentially, while on a constant currency basis growth was 2.8%. Clearly, the rupee appreciation against the dollar prevented the top-line growth to percolate down.

2. Rupee appreciation impacted the company’s operating margin as well, which fell by 43 basis points (bps) to 26.3%, as against market expectation of 26.5%. However, the bottom-line was boosted by higher other income and lower foreign exchange losses. This resulted in the company posting its highest ever return on equity of 36%, though the quality of earnings is not as good as the market would like it to be.

3. In terms of geographies, Europe was the fastest growing market for HCL Technologies with a growth rate of 24.9% - more than twice as high as that of USA that posted 12.2% growth. In terms of services, infrastructure services posted a rise of 33.2% followed by business services with 20.8% growth. Public services – the fastest growing vertical – registered a 43.5% growth and financial services by 22.4% growth.

4. Highlight of the quarter is clearly the order wins of over $1 billion in the final quarter. The company has signed over $5 billion worth of contracts with over 50 transformational engagements.

5. The negative takeaway from the results apart from subdued revenue in rupee terms is the persistent high attrition rate. Though the attrition rate has been flat as compared to previous quarter at 16.9%, the company still has one of the highest attrition rates among the top companies (second only to Infosys). Combined with a high utilisation rate of 84.5%, this gives very little flexibility in ramping up growth or margins.