HCL Tech Q3 results well below estimates

Analysts concerned as growth of key segments - software services & IMS - fall to single digit

The March quarter (third quarter for the company) performance of HCL Technologies has come below the Street's estimates on all counts. While the Street was expected a modest sequential growth in dollar revenues, the company reported a flat quarter 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 quarter. 

The constant currency revenue growth  figure is relevant as it suggests that core business growth is intact, even as profitability has taken a hit due to the turmoil in the currency market. This currency impact is visible in the rupee revenues as well, which declined 0.2 per cent sequentially to Rs 9270 crore. The market reacted negatively to this, as it is 1.2 per cent below Bloomberg's consensus estimates. Similarly, the company's net profit contraction of 12.2 per cent quarter-on-quarter to Rs 1,680 crore is also below estimates. 

As was expected the company's margin and net profit took a hit due to the currency woes. However, the contraction was much higher than the market's estimates, which led to the stock falling two per cent during the morning trade. Gross profit declined 4.7 per cent sequentially to $525.7 million, while operating income 9.8 per cent to $336 million. Operating margin (EBITDA marging) declined 250 basis point 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 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 IMS business grew 0.3 per cent QoQ in dollar terms, but YoY the growth fell to single digits at 9.8 per cent for the first time ever. The BPO business continues to show traction claim analysts.