For HCL Tech, sequential growth to stay uneven

Client additions remain robust, despite muted 0.5% dollar revenue growth

HCL Technologies is the latest IT (information technology) company to report slow revenue growth for the quarter ended September. After its pre-quarter forecast, the company's 0.5 per cent sequential growth in dollar revenues and 7.7 per cent year-on-year growth was largely in line with the Street's muted expectations.

In constant currency, the revenues grew 1.2 per cent quarter-on-quarter and 13.5 per cent year-on-year. Despite the sequential slowdown, the company is confident of running ahead of its larger peers in the current financial year, as its revenue mix is now titled towards large complex deals.  

The company has a credible explanation for the slow sequential growth in revenues. HCL Tech's chief financial officer Anil Chanana says the company is in the midst of a shift, with the focus moving to multi-country projects, which are far more complex and where execution cycles are elongated. In the quarter ended  September, the company added one client in the $50-million bucket, three clients in the $30-million bucket and two clients in the $20-million bucket.

According to Emkay Global, HCL Tech continues to do well on core business progression (clients moving to higher-revenue buckets) with decent performance in top clients. Also, the top five clients have grown ahead of the company average, despite an overall subdued revenue performance. On a sequential basis, the top 10 clients grew 3.5 per cent in dollar terms.



The top 20 grew in line with the company's revenue growth at 0.5 per cent. The company has signed on 10 such large transformational deals during the quarter. In addition, the company has invested in setting up a delivery centre and setting up engineering laboratories. The large deals have also required the company to take on employees on board, which has increased the onsite employee mix. Slower execution in large deals will make the revenue growth uneven on a sequential basis. But, some analysts say, with the company growing revenues at such a lukewarm pace, meeting the IT sector’s growth would be a challenge. After adjusting for the one-time provision of $20 million the company made over issues faced with one client, Ebit (earnings before interest and tax) margins expanded 40 basis points sequentially during the quarter to 20.1 per cent. Spark Capital believes, with the weak first quarter, meeting the sector growth is a tough ask. Management commentary on sustainable growth would be crucial for stock appreciation.