HCL Technologies: Volume-led growth

Growth impetus and valuation discount make the stock a preferred pick in the IT space

HCL Technologies has reported a 4.9 per cent quarter-on-quarter (q-o-q) increase in revenue to Rs 3,888.4 crore for the quarter ended December 2010. Ebitda (earnings before interest, taxes, depreciation and amortisation) margins remained flat sequentially at 16.3 per cent, despite a 2.4 per cent currency appreciation. The net profit grew 20 per cent to Rs 400 crore. The common currency revenue growth was an impressive 7.5 per cent to $864 million and came off a 6.7 per cent q-o-q increase in volumes and a one per cent positive impact of foreign currency movements.

The company saw nine per cent q-o-q growth in infrastructure and custom application services. Revenues from Europe grew seven per cent while those from the US rose six per cent. Revenues from other geographies saw a 14.5 per cent jump. Financial sector (five per cent q-o-q) and manufacturing (seven per cent q-o-q) revenue growth paralleled peers while retail sector revenues saw a 15 per cent rise.

While attrition was higher than normal at 17.2 per cent on the last 12 months basis, it has come down in absolute terms. However, lateral employee attrition continues to be a concern. Utilisation was at 96 per cent for onsite employees and 75 per cent for offshore ones.

The business process outsourcing revenues rose marginally (0.4 per cent q-o-q) with losses at the earnings before interest and taxes level falling, after struggling for the last few quarters. The management has guided for continued losses at the net level with profitability returning in January-March 2012. It has also indicated that revenue growth will parallel the industry’s figure with margin expansion being a key focus (it is targeting a 250-basis-point improvement to the 18.6 per cent levels seen in April-June 2010 in common currency terms).

The stock ended 3.97 per cent higher at Rs 507.9 on Wednesday over its previous close and trades at a price to earnings valuation of about 16.5x consensus FY12 (June-end) earnings per share estimates, while Tata Consultancy and Infosys are at 21x and 23x levels, respectively. The growth impetus and valuation discount make it a preferred pick in the information technology space.