HCL Tech numbers worse than street's estimate

Constant currency growth at 2.7% suggests strong core growth; slow growth in key segments a worry

The quarterly performance of HCL Technologies has come well below the Street’s estimates on all counts. While the Street was expecting a modest sequential growth, the company’s dollar revenues remained flat at $1.49 billion. A key positive, however, is the 2.7 per cent revenue growth in constant currency, especially after a strong 6.2 per cent growth in the December 2014 quarter.

The constant currency revenue growth figure is relevant as it suggests that core business growth is intact, even as dollar sales and profitability has taken a hit due to the turmoil in the currency market.

This currency impact has hurt rupee revenues, too, which declined 0.2 per cent sequentially to Rs9,270 crore. The market reacted negatively to this, as it came below consensus estimates. Similarly, the company’s net profit contraction of 12.2 per cent quarter-on-quarter (q-o-q) to Rs1,680 crore also disappointed the market.

While a contraction in dollar sales, margin and profit was expected, the reported numbers are much worse than estimates. The stock fell 3.5 per cent after the company reported its numbers. Gross profit declined 4.7 per cent sequentially to $525.7 million, while operating income 9.8 per cent to $336 million. Operating margin declined 250 basis points sequentially to 22.5 per cent during the quarter. HCL Tech’s Ebit margin in the March quarter fell 250 basis points sequentially to 21.3 per cent. As a result, net profit in dollar terms fell 12 per cent sequentially to $270 million. Net income was up 2.3 per cent year-on-year (y-o-y) in dollar terms. Analysts also expressed concern as the debtor days have increased sequentially to 66 from 63, while unbilled revenue days rose from 26 to 31.

Other than this, there are some concerns on the segmental growth, too. The software services business is down 0.5 per cent quarter-on-quarter in dollar terms. More worryingly, compared to the corresponding quarter last year, the segment’s growth is down to 8.2 per cent after six successive quarters of improvement in this business and double digit growth. According to Karvy Stock Broking, the key infrastructure management services business grew 0.3 per cent q-o-q in dollar terms, but y-o-y the growth fell to single digits at 9.8 per cent for the first time ever. The business process outsouring business continues to show traction claim analysts.