HCL Tech: A good performance

The technology firm did well last quarter but analysts believe the stock is fully valued.

Although HCL Technologies reported good results for the June 2009 quarter, with a near 8 per cent sequential growth in revenues and an increase in the ebitda (earnings before interest, tax and depreciation) margin of about 80 basis points to 22.1 per cent, analysts believe the stock is fully valued. The HCL Tech stock has risen by over 200 per cent since March this year and currently trades at 312.

At this price it is valued at just under 19 times estimated 2009-10 earnings and around 14 times estimated 2010-11 earnings. Analysts are concerned about the fall in the number of employees in the IT services space — they point out that this space had around 500 people less in the June 2009 quarter, while in the March 2009 quarter, the number dropped by 300 people.

They also believe the utilisation levels achieved at 76 per cent offshore and 97 per cent onsite, may not be sustainable. Better utilisation levels were one reason for the strong margins last quarter. The other factor that impacted margins was the control on sales and administration costs.

However, the growth in revenues was strong, driven by the infrastructure services segment which grew nearly 26 per cent quarter-on-quarter. Better realisations and utilisations rates meant that the ebitda margin for IT services was up 180 basis points sequentially. However, margins for the BPO business fell slightly.

Nevertheless, the improvement in the operating margins overall and lower than expected losses in foreign exchange resulted in the net profits rising by about 50 per cent.